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China's definitive reform agenda prioritizes combating income inequality and highlighting the market's role
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UPDATED: November 19, 2013 NO. 47 NOVEMBER 21, 2013
Third Plenum Points
Future growth must harness China's growing ranks of urban consumers
By Kerry Brown

The communiqué issued after the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) on November 12 was striking because it raised questions about what a China where the majority of the people live in urban areas would look like. The new Party leadership in place since November last year, who assumed office as of March, have spoken a great deal about the issue of urbanization. This plenary session has given two views on how accelerated urbanization might occur. One is to address the household registration system, so that there is more parity between rural and urban dwellers. The second is to steer China toward a service-orientated economy, and at the heart of that is a drive to build a strong financial sector.

Most would feel that China's urbanization process has been rapid and extensive. In 1978, at the start of the reform and opening-up process, only 15 percent of people lived in cities. Over a third of the economy was agricultural. One of the most important effects of the reforms was to improve agricultural productivity by granting farmers the right to sell surplus crops to the state for profit. This freed up surplus labor and led to "town and village enterprises," a vehicle for pursuing non-agricultural economic goals.

In the 2010 national census, the survey showed that China was now effectively a society in which—for the first time ever—as many people lived in cities as in rural areas. This follows a global trend, but it raises the question of what an urban China might be like. Over 250 cities now exist in China with populations exceeding 1 million. Cities like Shanghai have exploded from 10 million residents in the early 1990s to nearly 25 million today. In any week, 12,000 new dwellers arrive in the city, creating challenges for infrastructure, welfare, employment and social cohesion. This is a pattern repeated, to varying degrees, across the country.

Urban sprawl

The plenary session's communiqué underlines the fact that the path to a more urban China is not one that the country can ignore. The higher value, more service sector orientated economy that Premier Li Keqiang has referred to in many of his statements and speeches is one which will inevitably be urban. Fast, sustainable growth must come from urban areas, meaning that rural areas will be able to produce more food, introduce more mechanization to the agricultural sector and maintain more land for produce so that China's food security challenges can be met in the coming decades.

An urban China, where as many as three quarters of the population live in cities, will be a radical break from the past. The great sociologist Fei Xiaotong (1910-2005) wrote, in 1947, that Chinese society remained agrarian, a world where people lived in tight -knit communities in which everyone was known and the bonds of trust were strong. In 2013, Chinese society is no longer like this. Change has been profound and rapid. More and more Chinese live in communities in which they were not born. They are amongst the most mobile people on the planet, with perhaps 200 million migrant laborers, living for extended periods away from their rural homes in urban settings.

An urban China, as the plenary session made clear, will need to have a flexible labor system, and one where residency rights will be easily transferable. It will be a China in which those who live in cities will have access to public goods on the same level as natives of the place they have moved to. That will mean that local governments will have great challenges in providing public goods to migrants, including medical care, education and social security. There will need to be adjustments to how this is funded. All of these issues have been widely debated in China over the last two decades as the urbanization process has accelerated. There will now need to be a consensus on the best administrative structures and policy instruments to satisfy the expectations and the challenges of a newly urbanized Chinese citizenry.

This leads to the second issue: What economic structure might an urban China have? The plenary session's communiqué refers explicitly to the need to create a strong financial sector. The service sector currently accounts for 46 percent of China's GDP. In a developing economy, this is 10 percentage points higher, at 56 percent. In a developed economy, it is as high as 80 percent. Strengthening the sector has been part of the government's strategy to create growth for a number of years. Finance is a critical part of the service sector. There is another dimension to this. An urban China is also one where another challenge that China faces becomes more soluble—increasing consumption. Consumption remains only a third of GDP, compared to over double this in a developed economy. An urban China is a China where consumption is likely to increase, and where consumers are likely to become users of services.

Factoring in finance

Finance is a complex sector to develop. The suggestion made at the plenary session was that building a finance sector in China will be incremental, and that the starting point will be centers like Shanghai and Tianjin. Shanghai has already opened a pilot free trade zone, where trading of Chinese currency might become possible. It is also clear that in Shanghai with the international financial center established there in the last decade, there is the framework for a financial sector which will be able to serve the huge domestic market. Finance will be the provider of jobs, and the high-quality growth that this government is aiming for.

An urban China brings challenges, however. Having such a vast group of people move into cities will create sustainability issues. Water provision is one of the key issues, with the water table in major cities like Beijing now at critically low levels. Pollution will also be a massive issue. Shanghai registered 2 million cars for its roads, and still had to build a huge new subway infrastructure, much of it before the Shanghai Expo in 2010. Beijing currently has the second largest subway system in the world after Seoul in South Korea. Even so, with 5 million registered cars, roads are often clogged and car-related pollution high. Cities will have to become spaces for social and architectural innovation, because never before has the pressure on infrastructure and sustainability been so high. The impact of this on people's lifestyles, on their diets, on their relationships with each other, will be profound. In many cities, the majority of people will be newcomers, meaning that a sense of community and shared civic values will be important.

An urban China, as it is outlined through this plenary session, also creates opportunities for the outside world. Seeing Chinese increasingly as potential users of services as consumers who are keen to buy Western goods, and as partners in harnessing the enormous growth potential in China, is clearly sensible. China, as a manufacturing base and an exporter, is likely to be replaced in the decade ahead by China as a customer, a service user, and a market for technology and value-added goods. The plenary session communiqué, with its vision of an urban China and the routes to achieve that, is also a statement that multinational companies need to think of strategies to engage in this process. Research produced in Europe recently has shown that Chinese consumers in cities are information hungry, open minded (there is little of the 'buy-local' mentality that sometimes dominates Western markets. The issue is buying good quality, reliable goods) and price conscious. For companies in the rest of the world to start reaching these new consumers is a fresh challenge.

The author is an op-ed contributor to Beijing Review and executive director of the China Studies Center at the University of Sydney

Email us at: yulingtao@bjreview.com

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