Urbanization helps consumption
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Given its convocation against the backdrop of complicated and uncertain economic conditions at home and abroad, this year's Central Economic Work Conference assumed added significance.
China's economy has performed better than expected despite the impact of an unprecedented global financial crisis in decades. To continue the fledging economic recovery, the highest-level annual economic conference, which outlines policies and measures for next year's economic development, vowed to push forward long-overdue economic restructuring and improve economic quality and efficiency, along with other measures. The conference also committed to steadying the advancement of urbanization as an important measure to boost domestic consumption, a concept put forward for the first time by top decision-makers. Urbanization, if pressed ahead with smoothly, would undoubtedly help the country convert its enormous consumption potential into a strong propulsive force for sustainable economic development.
Due to the existence of a long-standing dual economic structure, economic development in rural areas has lagged far behind urban areas. The country's demographic composition, in which the rural population accounts for a larger proportion, has been one of the largest obstacles to rapid consumption growth. Last year, the rural population stood at 720 million, or about 54.3 percent of the country's total. Given their lower incomes, conservative spending habits and the less-developed social security system, rural residents are reluctant to spend hard-earned money on items other than those that meet their basic needs. That, together with the sluggish urbanization process, has contributed to the failure to raise the ratio of consumption in the country's economic development.
Since 1997, farmers' income has stayed at a low level, with the income gap compared to their urban counterparts continuously widening. According to statistics, the urban-rural income ratio was 2.2:1 in 1990, which widened to 2.79:1 in 2000. The divide further expanded to 3.3:1 last year, with the annual per capita net income of farmers accounting for only 4,761 yuan ($679), equivalent to urban residents' income level in 1996. Undoubtedly, slow rural income growth has directly hampered their willingness to spend. This could best explain the declining ratio of rural consumption in the country's total consumption. Statistics showed that the ratio of rural consumption in the country's total was 67.5 percent in 1979, but the proportion declined to 32.0 percent last year, with an average 1.9 percent rate of decline year-on-year. Meanwhile, the proportion for urban residents increased from 32.5 percent in 1979 to 68 percept last year, with an average annual growth rate of 1.9 percent.
The central government's plan to gradually remove long-standing urban residence restrictions in medium- and small-sized cities, a message transmitted from the Central Economic Work Conference, is expected to speed up urbanization and boost consumption.
Due to a strict residence permit system and long-standing discriminatory treatment toward migrant workers, annual urbanization growth has declined from 1.4 percentage point to the current 1 percentage point. The work conference explicitly stated that the country would make it an important task to advance urbanization and help qualified rural residents to gradually settle down in cities and towns by slowly relaxing restrictions on their settlement. Such a policy shift by the authorities will surely contribute to the freer movement of rural populations to urban areas and improve the country's urbanization steps.
China is now at the stage of industrialization and urbanization, with each promoting development of the other. Other countries' experience indicates that a country's industrialization level could raise its urbanization level. During the middle stages of industrialization, a country's urbanization ratio usually ranges from 36.4 percent to 49.9 percent and is about 65 percent at later stages. China's urbanization ratio was 45.9 percent last year, which means the country still has to raise it by 4.2 percentage points to push forward urbanization. According to the country's development road map, industrialization will be basically achieved by 2020. Should the average annual urbanization pace of the previous 10 years be achieved, the country is expected to complete its industrialization goal by that year. By that time, the urbanization ratio would rise to 60 percent. Such a high level is expected to be a big boost to much-needed consumption and promote sustainable economic development.
It is estimated that a one percentage-point rise in urbanization will result in the movement of an additional 10 million farmers to cities. Accelerated urbanization will prompt the country to invest more in infrastructure construction, which will drive domestic demand and economic structural adjustment. At the same time, rising urbanization means that the government will be able to offer well-developed education, medical care and housing networks for more people, a move that is also expected to help people more willing to spend.
If the urbanization ratio could reach 60 percent by 2020, that means 225 million more rural residents would turn into urban dwellers. Based on last year's per capita individual consumption of 9,700 yuan, the newly increased 225 million urban people in the coming decade are expected to add 2.1886 trillion yuan in consumption, which will push the country's consumption ratio 0.7 percentage point higher.
The author is a senior economic analyst with the State Information Center.
