​MNI INTERVIEW: China Urban Growth Key to Higher Consumption

China should encourage cities with a population over 5 million people to form metropolitan city clusters instead of limiting their size, a policy advisor tells MNI. Increased urbanisation would help the country's "dual circulation" economic policy he added.

"Generally speaking, Chinese big cities are not big enough while the country has too many small cities," said Lu Ming, a professor with Antai College of Economics and Management at Shanghai Jiaotong University. Lu attended the recent advisory meeting for the next five-year plan chaired by Chinese President Xi Jinping in August.

--NEW URBANISATION MODEL

The new urbanisation model based on city clusters is a key part of the "dual circulation" initiative to increase domestic consumption in China, said Lu. China's urbanisation ratio – how much of the population lives in cities – is roughly 60%. This figure is 10 percentage points lower than other developed countries when they had similar levels of GDP per capita, according to Lu.

Up to 40% of the population of China's major cities are not registered locally, meaning they can't equally access service such as social security or medical insurance. Lu said the Chinese government should aim to reduce the number of people without city status by two to three percentage points per year, registering all city dwellers by 2035.

Registering the urban population is key to increasing China's domestic consumption because non-local residents consume up to 20% less than official residents said Lu. This is because non-residents need to save more money for items such as medical expenses and retirement.

"When this (new) target is in place, urbanisation should speed-up as rural people understand that becoming a registered citizen is now easier."

--STATE EXPENDITURE

The cost of providing social security is higher in urban than rural areas and Chinese officials have warned the bill for registering all undocumented migrants could be up to CNY50 trillion over the next 20 years. But Lu said that this number has been "highly overestimated" and pointed to research that says the actual annual cost should be around CNY640.9 billion. He said this figure was manageable in the context of China's state expenditure.

Increasing urbanisation will require greater investment in infrastructure but Lu said higher tax revenues, and a better economic outlook for city clusters meant this policy could be part self-funded.

"In terms of the current financial situation, big cities are typically not the regions with the worst financial situations," Lu said, "Plus, the bigger population and higher levels of economic activity found in city clusters, will increase tax revenues to local government."

--ADDITIONAL BORROWING

China's local government debt is currently at CNY37.6 trillion, and while this figure concerns some officials, Lu said that additional borrowing by this sector made sense for projects which would increase economic growth.

"Local government debt cannot be denied. The important point is where the borrowed money is invested. The 30 biggest cities in China still have the potential to expand. As long as growth continues there will be a return on the investments and the debts can be repaid," said Lu.