The meme of the moment remains China's 'rotation' to urbanization as the new growth engine, but as SocGen's Wei Yao notes, while this shift from farmers to manufacturers has raised productivity, urban population growth is set to decelerate rapidly in the current decade. Yao comments that the impact of urbanization has been "misunderstood and overstated by the market" as it is now official that China’s working-age population has peaked and is starting to decline. China’s National Bureau Statistics announced that the share of population aged between 15 and 60 years old declined for the first time in 2012 by 0.6ppt to 69.2%. This slower labor growth brings China ever closer to the so-called "Lewis Turning Point" at which excess labor in the agriculture sector is fully absorbed into modern sectors - leading to no or negligible productivity improvements. The bottom line is that hopes for "new urbanization" appear overdone, given the demographic (and productivity) headwinds and China's focus should shift to social safety nets and not torrid physical construction.
The new hope among policymakers and many observers is that urbanisation will be the savior, (partially) offsetting the fast deteriorating population trend. This thinking – termed by Premier-to-be Li Keqiang as “New Urbanization” – has also ignited another round of hope for China’s physical infrastructure and residential construction. However, we beg to differ.
First, although China’s urbanization rate still has quite some scope to increase further, the contribution to growth via labor productivity will still decline due to potentially slower urban population growth. And in terms of policy, the urgent issue, in our view, is no long to keep funding torrid physical construction, but to build a sustainable social safety net.
China’s National Bureau Statistics announced that the share of population aged between 15 and 60 years old declined for the first time in 2012 by 0.6ppt to 69.2%. This is a narrower gauge than the more commonly used working-age population measure of between 15 and 65 years old. Nevertheless, it highlights the pressing nature of China’s demographic challenges. Compared with the past experiences of developed economies, China reached this turning point nearly one decade earlier.
The impact will be more pronounced between 2015 and 2020, as the labor force is expected to see outright contraction. This wrenching demographic trend will also have a particularly negative implication for China’s capital stock growth, which accounted for 40-50% of the double-digit growth in the 1990s and 2000s.
This slower labor growth brings China ever closer to the 'so-called' "Lewis Turning Point" at which excess labor in the agriculture sector is fully absorbed into modern sectors - leading to no or negligible productivity improvements.
To facilitate efficient urbanization, China needs a new strategy that focuses on three aspects:
- the removal of obstacles on labor mobility,
- a fiscally sustainable safety net,
- and urban job creation.