By John Richardson
THE blog would again be in the position of being able to afford a yacht in Monte Carlo if it had a dollar, even in an Australian dollar these days, for every time it has heard the phrase “urbanisation will underpin long-term growth in China”.
But just as some of the other myths surrounding China’s economy need to now bite the dust, so must the urbanisation myth, according to economists at Nomura.
In a February 2014 research note, they argued that:
- In 2013, China’s urbanisation ratio, measured as the urban population’s share of the total population, rose by only 1.16 percentage points. That’s the slowest rate since 1996, except for 2008, when the global financial crisis hit China.
- Growth of the urban population has fallen in the last three years, to 2.7% in 2013 from 3.9% in 2010, having averaged 4.0% from 2000 to 2010.
- They believe that the pace of urbanisation is set to slow further. “If the trend since 2010 holds, we estimate that the annual increase in the urbanisation ratio may drop to around 1 percentage point in 2014-15 and below 1 percentage point thereafter,” they said.
Rapid industrialisation and “servitisation” have come to an end.
Industrialisation played a crucial role in China’s urbanisation process with Shenzhen, a city close to Hong Kong, representing a typical example of this, said the bank.
Between the 1980s and 2012, Shenzhen developed from a small fishing village of 30,000 into China’s third-largest city, with a population of 10.6 million, it added.
This was largely because multinationals moved their production bases into Shenzhen in order to take advantage of cheap labour and the city’s convenient location close to Hong Kong.
As households with higher incomes demanded more services, service sector growth started to outpace that of the industrial sector. The service sector’s share of Shenzhen’s GDP rose from 46% in 2005 to 57%in 2012.
For the country as a whole, the industrial and service sectors added 0.64 percentage points to GDP growth per year in 1960-2006. But their contributions fell to just 0.16 percentage points per annum between 2007 and 2013.
Countries such as Japan and South Korea experienced similar sharp slowdowns in industrialisation and servitisation, after which the pace of urbanisation slowed by an average 0.9 percentage points per year.
Another factor highlighted by Nomura was the Lewis Curve.
The number of new migrant workers halved to 6.3 million in the three years to 2013, despite salaries on offer almost doubling, said the bank
“If this deceleration trend continues, as we expect it to, the number of migrant workers may begin to contract by 2016,” wrote Nomura’s Zhiwei Zhang, in the same study.
And an IMF paper – “Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?” predicts that China will move from a vast supply of low-cost workers to a labour shortage economy at some point between 2020 and 2015.
“The pace of urbanisation did not slow until 2011, despite the significant moderation of industrialisation and servitisation since 2007,” Zhang said.
“This was largely due to urban area expansion, driven by the government, which picked up speed after the onset of the 2008 global financial crisis.”
However, government-driven urban expansion was facing binding constraints. It had been financed by government debt and land sales, while fiscal conditions have deteriorated sharply, said the study.
The actual fiscal deficit, based on IMF estimates, rose to 10% of GDP in 2012 – comparable to India, Japan and the U.S.
If local government financing vehicle (LGFV) debt, railway debt and asset management companies’ debts were included, Nomura estimated that total public debt-to-GDP reached 75% in 2013.
And the bank said that more than half of LGFVs would be unable to service even their interest expenses, never mind principle repayments.
Land sales were equivalent to 59.4% of local government and 68.1% of central government budgetary revenues in 2013, continued the research note.
Land sales look set to slow on the oversupply of properties in third- and fourth-tier cities, according to Zhang (see our blog post tomorrow for more on the problems facing China’s property sector).
Nomura also identified the environmental crisis as another big constraint on further urbanisation. There is not much in continuing to pursue a growth model that is killing more and more poor and middle-income people, whilst also persuading the rich, fortunate few to flee the country.