Benefits from urbanization

Rural residents reap rewards as migrant workers send back cash

Although China's future economic outlook is still uncertain amid global recession, a huge amount of purchasing power will be unleashed through urbanization, a recent report said.

Urbanization is a process in which the rural population moves into cities and towns. Over the past 20 years, China experienced an ever-accelerating process of urbanization. According to the National Bureau of Statistics, China's urban population reached 690 million in 2011 from 170 million in 1978. The percentage of the urban population increased from 17.9 percent in 1978 to 51.3 percent in 2011, while the rural population plunged from 82.1 percent in 1978 to 48.7 percent in 2011.

The rapid urbanization has seen a large number of rural workers become urban residents. The trend will continue to maintain upward momentum in the immediate future. It will bring a sharp increase in consumer demand and investment demand and also generate huge needs in infrastructure, public service and housing.

If the process is properly handled by the central government, the urbanization drive will foster an important engine of China's future economic growth, said a report by Liang Da, a senior economist with the National Bureau of Statistics.

According to the report, urbanization will at first push up the country's investment. When the urbanization rate increases by 1 to 1.5 percentage points, 15 million to 20 million people are added to city populations and an annual investment of 1.5 trillion yuan ($241 billion) to 2 trillion yuan will be allocated.

Second, urbanization will drive market demand. The per capita consumption ratio of China's urban residents to rural residents is about 3.3 to 1. When the rural population transfers to urban areas, their income and consumption will inevitably increase, said the report.

"China's rural shoppers have been largely overlooked in recent years because businesses have concentrated on China's growing middle class in cities," said Dale Preston, senior vice-president of analytics and consulting, Nielsen Greater China.

"But these premises no longer hold true as rural incomes are growing at a faster rate than urban incomes. Ignoring China's rising rural class would be a very costly mistake for fast-moving consumer-goods manufacturers."

According to the National Bureau of Statistics, from 2002 to 2011, the average annual growth of the urban population was 3.8 percent, an average increase of 21 million people a year. In the next 10 years, about 20 million rural people are expected to become urban residents annually, which will bring a substantial increase in consumption for both agricultural and industrial goods.

According to Kantar Worldpanel, a London-based market research company, China's third-tier cities continue to lead the growth, which in turn fuels their domestic consumption.

The volume of fast-moving consumer goods products bought per household expanded 3.1 percent in the country's provincial capitals, 4.8 percent in prefecture-level cities and 5.4 percent in county-level cities. The demand in the lower-tier cities remained buoyant, according to Kantar Worldpanel.

"The country's 250 second-tier cities will be the main drivers in fur consumption as a result of the urbanization," said Mark Oaten, chief executive officer of the International Fur Trade Federation.

China has become the world's largest fur production and consumption country since 2011. The country's fur trade accounts for a quarter of the global total. IFTF believes that the market will be robust in the next decade as more and more people and money move into the cities.

Besides the consumer goods market, huge consumption will also be generated in infrastructure construction. Urbanization will promote public services (education, healthcare, social security, employment), consumer services (trade, catering and tourism) as well as the development of producer services (finance, insurance, logistics), the report said.

At the same time, urbanization promotes industrial restructuring and upgrading. Cities and towns provide a broad platform of better technological research and development as well as human resources, which create conditions for the restructuring and upgrading of the manufacturing industry.

In addition, urbanization also increases the employment rate of the service industry.

According to the China General Chamber of Commerce, 70 percent of the newly urbanized population went to the service industry for jobs.

In the long-term background of world economic recession, the country's urbanization will continue to prop up the economy because there is much room for development in the next decade. Data from the National Bureau of Statistics show that as the urbanization rate reaches 30 to 70 percent, the process hits a period of fast development. According to the bureau, China's urbanization rate reached 51.3 percent in 2011. The figure will reach more than 60 percent in 2020.

"There's been a widely held assumption that when villagers migrate to work in urban areas, their increased earnings lead to higher spending, turning these consumers into urban shoppers," said Preston of Nielsen Greater China.

"The truth is, migrants actually maintain their rural shopper habits but work and sleep in an urban environment," Preston added.

According to the World Bank, migrants send home around $45 billion a year, with some sending 80 percent of their income to their families. Migrants also tend not to spend money in urban centers, leaving families in villages with more money, which is leading to increased spending on better homes, children's education, consumer durables and more premium groceries.

"Theoretically, urbanization can expand domestic consumption, but the government first needs to be willing to spend on public services and infrastructure construction, as well as providing social welfare for the migrant workers," said Zhang Xiaoshan, an academic with the Chinese Academy of Social Sciences.

"So, whether the government is willing to pay the huge bill is the key to sound urbanization."