Urbanization Won't Save The Chinese Economy

In nearly every public speech since the leadership handover, Li Keqiang, who will take over as premier in March, has spoke about the importance of urbanization as a new growth engine.

Societe Generale's Wei Yao however writes that the impact of urbanization has been "misunderstood and overstated by the market".

For one, Yao writes that the impact of urbanization on China's productivity growth is decreasing, just like the the direction of demographics on labor force growth.

"For an emerging economy to catch up, moving farmers to manufacturing plants is a key source of productivity gain in the early stage. China?s experience in the past three decades was a typical example.

The 10-year average growth rate of China?s urban population growth was 4.8% in the 1980s, 4.2% in the 1990s and 3.8% in the 2000s. The impact of this rapid urbanization on total factor productivity (TFP) was particularly pronounced. We estimate that this source accounted for about 30% of the impressive TFP growth.

"However, urban population growth should also decelerate rapidly in the current decade. The UN projected China?s urban population to grow 2.5% in the 2010s, 1.3ppt slower than in the previous decade. As a result, China?s labor productivity growth, which averaged 8% in the 1990s and 9.5% in the 2000s, will normalize lower as well."

Others share this view. Peter Orszag, vice chairman at Citigroup, has pointed this out before. He said China is near its Lewis turning point i.e. the point at which the shift of people from agriculture to manufacturing does not lead to productivity gains. "If China is at or near its Lewis turning point, Xi will face an extraordinary economic challenge, with far-reaching geopolitical ramifications." he wrote.

Markets have been responsive to policymakers' comments on urbanization and encouragement of infrastructure investment.

But Yao writes that this could be a huge impediment to its future urbanization and that Beijing needs to rethink its strategy to focus on:

1. Removing obstacles to labor mobility, namely Hukou, a household registration system. "?Given the projected urbanization trend and the number of migrant workers who do not have urban Hukou, the government may need to pour 40 trillion yuan into this project, equivalent to 20-25% of the total on-budget fiscal revenue by 2020".
2. A fiscally sustainable safety net.
3. Urban job creation.

Remember China had been trying to shift from export and investment driven economic growth, to domestic demand growth. This focus on urbanization could stall Beijing's long-term efforts on developing its growth model.

SEE ALSO: GMO - China Is Marching Towards A Credit Crisis >

Source: http://feedproxy.google.com/~r/businessinsider/~3/RGsyjhjq2s0/urbanization-cant-save-chinese-economy-2013-1

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