Lu Ming, Professor, Antai College of Economics and Management, Shanghai Jiao Tong University

A version of this article was originally published in the Business Standard as ‘Towards sustainable urbanisation in China’, 6 May 2017. This is part of a series by Chinese economists facilitated by the ICS.

China has received enormous dividends from its decades of urbanization, which provided labour resources for the development of its industrial and service sectors and rapidly raised the income of the Chinese people. A large number of Chinese farmers became part of the country’s modernization process, allowing for poverty alleviation in rural areas. At the end of 2016, the urbanization rate of China stood at around 57%

China however, continues to face serious impediments in the urbanization process.

One of these is China’s household registration system or the hukou, which connects a person’s right to access public services with whether or not he has a resident status in a locality. The reality is that some one-third of city dwellers in China are trans-regional immigrants who actually do not possess local household registration. As a result, they do not enjoy the same level of social security and public services as local urban residents.

This is a particularly serious social problem for China. One major consequence of linking the hukou to public service is that there exists 60 million liushou ertong or children left behind by their migrant parents in their home villages in China. These children are more or less left to fend for themselves and meet their parents only sporadically over a year. At the same time, there are about 30 million migrant children in China’s cities who also do not enjoy the same education opportunities as local urban children with the hukou.

The difficulties of educating these 100 million children, is a chronic malady of the urbanization process in China today. If not addressed, this problem poses a great threat to the healthy and sustainable development of China’s economy in the future.

China’s system of land allocation is another big barrier to the urbanization process. The government controls the quantity of agricultural land that can be converted to urban land under a ‘construction land index system’. As a result, the supply of newly added land is very limited and in cities such as Shanghai and Beijing, house prices are extremely high.

At the same time, the government provides greater allocations under the construction land index to those areas which see a large population outflow so as to help them develop local industries and build up new cities. While the intention is to retain the population, in reality, a large number of industrial parks are idle and new cities remain empty.

These problems are closely related to two popular but erroneous ideas in China. The first is that the population in Beijing and Shanghai is too high while the other is that it is the concentration of economic development only in the coastal areas and super large cities that leads to unequal economic development between regions.

In reality however, Beijing and Shanghai are more than just cities – they are metropolitan areas composed of a number of cities around the central city. They have an area of approximately 16,000 square kilometers and 6,000 square kilometers, respectively and can be compared to the Tokyo metropolitan area. However, while the latter has a population of 37 million plus, at the end of 2015, the population of Beijing and Shanghai stood considerably lower at 21.75 million and 24.15 million respectively. Even including the small cities nearby, Beijing and Shanghai lag behind Tokyo.

Meanwhile, in terms of regional imbalance, the problem is not overcentralization of economic activity. There is, in fact, a lot of evidence to prove that China’s economic agglomeration is far lower than that of developed countries and lower than some developing countries at a similar stage of development. The real problem is that the distribution of the concentration of the population is not in tandem with the economy’s requirements leading to the widening gap in the per capita GDP of different regions.

The solution to the problem is not to seeking greater evenness in regional economic distribution but to let the population move still more freely. This would allow each region’s GDP to accord more naturally with whatever its share of the population is.

In practice, however, China’s household registration system and discriminatory public services system have become ways to limit population in the mega cities. The government also uses administrative power to transfer resources to the less developed regions in order to balance regional development. After 2003, the land supply to the in-flow areas was tight while there was land supply was eased in the out-flow areas. As a result, the house prices in some first-tier cities reached astonishingly high levels while a large number of third- and fourth-tier cities have turned into ghost cities.

The Chinese government purports to respect the laws of urban development, but Chinese society itself is not educated about the laws of urban development. Only by realizing the prevailing laws of urbanization – that the rate of urbanization will constantly move upward and that the population will naturally concentrate in big cities – can resource allocation during urbanization adhere to market principles. The Chinese government needs to increase the supply of land, and public services and infrastructure availability to all residents in in-flow areas so as to ensure that China’s urbanization will be follow a healthy and sustainable trend in the future.