By 2030 China's cities have to be equipped for at least 350 million new inhabitants

August 29, 2008

The Olympic Games in Beijing. All eyes were trained on the Chinese capital, and the whole world observed a fast-expanding megacity whose agglomeration is home to some 16 million people. Rapid growth means change, and this opens up opportunities for investment, in housing, office space and the expansion of urban infrastructure. But China is more than just Beijing – much more. China already has nearly 100 cities that each boast one million inhabitants, and many of the country’s once smaller cities have undergone much more rapid growth than Beijing in the last 30 years. Shenzhen is now China’s fourth biggest city with 7.5 m inhabitants, but in 1980 it was scarcely bigger than Bonn with its 300,000 residents. Moreover, there are other cities that have more catching up to do than Beijing, since the capital was on the receiving end of extensive infrastructure investment in the run-up to the Olympic Games.

According to United Nations (UN) data, there are currently 530 million city-dwellers in China, or roughly 40% of the total population of around 1.3 billion. Compared with European countries whose urbanisation ratios are almost twice as high, China is thus still very much a rural society. China’s development into an urban society has, however, been progressing rapidly for decades. As recently as the middle of the last century only 13% of Chinese – a good 62 million people – lived in urban agglomerations. There are many reasons why more than eight times as many Chinese are now city-dwellers. The most important reason is industrialisation and the concomitant opening up of the country to international trade in goods. In addition, strong population growth and gains in agricultural productivity provided very cheap industrial labour. Population concentration in cities thus followed a similar pattern to that in Europe in the 19th century. The preferential tax regime in special economic zones and the comparative ease with which land can be purchased for expansion were also key policy measures that paved the way for urban growth.

It was specifically political support combined with China’s deeply rooted and extensive decentralised decision-making powers that triggered the blossoming of cities throughout the nation. Many new cities have been created, while many once smaller cities have simply mushroomed. As a result the urban population is now much more evenly distributed than 50 years ago: in 1950 nearly 90% of China’s urban population lived in the 100 biggest cities, with one in seven city-dwellers living in Beijing and Shanghai alone. Now the 100 biggest cities account for “only” a good half of the urban population, while Beijing and Shanghai are currently home to just some 6% of all city-dwellers. Relative to Germany’s urban population, even the Berlin and Hamburg conurbations are more populous than China’s two megacities.

How will the story continue? The urbanisation process is unlikely to grind to a halt. The UN forecasts that the number of city-dwellers in China will balloon by around 350 million by 2030, and that by the middle of the century China’s cities will be home to more than 1 billion inhabitants – nearly four times the current number of US city-dwellers. In fact, McKinsey Global Institute forecasts that the one billion mark will already be reached in 2030. While UN demographers thus forecast a marked slowdown in the urbanisation process over the coming decades, McKinsey’s analysts expect the annual growth rate to remain more or less steady  at about 2.5% at least until 2030.

The UN forecast is also striking because although it suggests that smaller cities will grow faster than larger ones going forward, it expects a narrowing of the difference between their growth rates, primarily because the population growth in the smaller cities will tail off very sharply compared to previous decades. The differing outcomes forecast by the UN imply that there will be a reduction in the assistance provided to new/smaller cities via special economic zones. If the McKinsey Global Institute projections turn out to be correct this would also be justified, as the McKinsey researchers are convinced that an urbanisation strategy heavily geared towards agglomeration delivers the best cost/benefit ratio – especially because investment in urban infrastructure can be targeted better. This is a task that is neither administratively easy, nor politically straightforward – not even in China. As long as the economy is so heavily dependent on industrial development it is also a risky economic policy strategy, since very strong agglomeration also leads to (even) higher wage increases. And this would undermine one of China’s key competitive advantages.

For investors, construction firms and machinery & equipment companies the message is largely identical regardless of the actual urbanisation path: China requires additional housing for at least 350 million city-dwellers over the next 30 years and several billion square metres of new office space. But the country’s most pressing need is for a modern local government infrastructure, that is functioning water and wastewater systems, new schools, more dense and more efficient mass-transit networks and hundreds of new power stations. Private capital, but even more so Western expertise should be incorporated into the Chinese urbanisation process for mutual benefit  – not only in Beijing and Shanghai, but specifically also in Guangzhou, Wuhan, Shenzhen and Xi’an as well as in the other 200 cities with more than one million inhabitants that China will boast in 2030.

More information:

Megacities: Boundless growth?

UN Population Division

Mc Kinsey Global Institute

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