• Alexander Liu-Middleton

China’s mega-cities increase potential for foreign investment.

The amount of megacities in China with populations similar to or larger than London’s eight million is projected to grow from nine today to 23 by 2030.

We ask where does China stand on urbanisation in the coming decades, now that 60 per cent of its population lives in urban areas, up from 18 per cent in 1978?

Will the parameters of the old development model, including big-city problems such as traffic congestion and pollution, cloud China's growth outlook against the backdrop of incoming demographic headwinds and the recent rise in external uncertainty?

In its reply to the above trials, China is forging a different urbanisation path, focusing on making cities faster, safer, greener and more liveable through structural reforms and digital technologies.

This era is underpinned by three initiatives:

Constructing super clusters: Policymakers and academics have debated the optimum size of cities. Simply put, cities that are too small lack the labour and efficiencies to power economic growth, and those that are too large become expensive to manage.

Perturbing over the latter, China launched "Western Development" in 2000 and "North-east Revitalisation" in 2004, for example. While such initiatives reduced regional income gaps and relieved pressure from population inflows into coastal regions, they have left room for efficiency gains from deeper urban agglomeration.

Indeed, China's larger cities are not oversized compared to international experience: US population concentrates in coastal regions, while UK and Japan's economy increasingly thrives around their capitals.

We believe city clusters, knitted together by the China's advanced rail system, should continue to reap the benefits of urban agglomeration while alleviating big-city problems. Five key city clusters across the country - the Yangtze River delta, Jing-Jin-Ji area, Greater Bay area, Mid-Yangtze River area and Chengdu-Chongqing Area - will reach an average population size of 120 million, close to Japan, accounting for three-quarters of GDP growth and half the increase in the urban population between 2019 and 2030.

Leveraging technology: Smart cities that leverage technologies, like 5G, the cloud, big data, the Internet of Things (IoT) and artificial intelligence (AI), should find ways to reduce traffic, crime and pollution, and greatly enhance the quality of urban life and the capacity of the cities of tomorrow. We expect the number of megacities with populations similar to or larger than New York City's eight million will reach 23 by 2030, versus nine today.

Smart farming: While China's agriculture productivity is now less than a 10th the level of that in developed economies due to fragmented land usage, land reforms and the wider adoption of smart farming should boost rural labour productivity, enabling more workers to migrate to cities. We expect China's agricultural labour productivity to more than double in the next decade, freeing up more rural people for further urbanisation.

Much of this is a reality today. It is already common to pay at grocery stores in Hangzhou or check in at the new Beijing airport using only facial recognition. By 2030, greater changes will be enabled by investments in digital infrastructure and the adoption of AI and big data. We expect high-speed commuter trains, smart traffic control systems, shared mobility and automated vehicle technologies to cut travel times and make streets and roads safer than ever, while electric vehicles and green energy sources reduce pollution.

On the policy front, the urbanisation strategy over the past two years has been shifting to focus more on promoting mega clusters in advanced regions, in our view. As evidence of this, the August 2019 meeting of China's Central Economic and Financial Affairs Commission - the country's highest economic policymaking body - specifically mentioned that "hub cities and city clusters are becoming the main medium for growth and development"; it was the first time in many years that policy-makers had emphasised the role of large city clusters in advanced regions.

Meanwhile, we have seen strong policy support for the three initiatives in the past two years, including launching special connected districts that strengthen coordination across local administrative boundaries within clusters.

We believe China is poised to be the global leader in smart supercity development, powered by the world's longest and fastest high-speed rail system and advanced 5G planning. We expect China's urbanisation ratio to reach 75 per cent by 2030, up from 60 per cent today, which translates into 220 million new urban dwellers. Total factor productivity will likely sustain at a 1.6 per cent compound annual growth rate through 2030 (versus 1.9 per cent in 2014-18), the highest among major economies. We thus remain confident that China will attain high-income status by 2025, with annual per capita income almost doubling to US$17,800 by 2030 from today's US$9,450.

From the micro perspective, Urbanisation 2.0 empowers three investment themes as disruptive technologies unleash further growth potential: from consumer to industrial Internet, digitalisation of old-economy industries (such as autos and financial services) and new lifestyles in smart supercities (such as IoT devices, online tutoring and healthcare).

There are concerns that capital spending for Urbanisation 2.0 will lead to renewed debt problems, but we believe this risk is manageable. We estimate the combined investment needed for digital infrastructure, high-speed rail and the smart grid will be less than US$200 billion a year in 2019-30, only about 10 per cent of China's annual infrastructure investment of the past five years. We also expect more transparent funding, given local governments' shift from shadow bank borrowing to bond issuance and, with market-oriented reforms, a potential increase in private investment, including foreign investors.

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