In 1978 China was on the cusp of reforming its planned economy. It was about to enter into a period of rapid and sustained economic growth. It was also about to urbanise at an extremely fast rate – hundreds of millions of Chinese would move from the countryside to cities over the next few decades.

When one thinks of China today, one thinks of an endless number of large cities which one has never heard of but which contain five million people each. But in 1978 that view of China was hardly apposite – then, only 18 per cent of the population was urban. But in 2010 that figure had hit 50 per cent and in 2018 the proportion of the population living in urban areas was nearly 60 per cent.

As the South China Morning Post reports, if this rate of urbanisation continues then over 70 per cent of the Chinese population will be urban by 2035. When one considers that the OECD average for urbanisation stands at about 80 per cent, there is good reason to think that there is a lot of potential for China to urbanise at the same speed it has since 1978. With the ruling Party wanting to see the Chinese economy relying more heavily on domestic consumption in the future, many in China will be hoping that continuing urbanisation will drive both this consumption and the economy in the next few decades.

However, below the headline numbers, there are a lot of wrinkles in this story of continued urbanisation. First, many of the migrant workers living in Chinese cities do not have the right to public services (such as health care, education and pensions) unless they can obtain a household registration (a hukou). Apparently the number of those holding a hukou is 10 per cent lower than China’s urbanisation figure. In order to alleviate the burden on migrant workers, the central government has recently (25 December) announced that the mandatory hukou system would be cancelled for cities with fewer than 3 million people. This will help a large number of people – about 40 per cent of all Chinese cities (266) would be affected.

While this will be welcomed by migrant workers, it will add another burden on local governments which are already saddled with debt. Although the Chinese government’s debt level is low at around 38 per cent of GDP in 2018, the off-budget debt for local government (which is not included in the official budget) is much higher. The IMF has calculated that augmented debt (which includes off-budget activity like local government financing vehicles) is 72.7 per cent of GDP in 2018. This indicates that the contingent debt pressure on local governments could be very large indeed and that local governments might be less willing or able to finance large long-term investments to accommodate newcomers.

On that debt theme, household debt is also a serious concern for a nation wanting to build economic growth on urbanisation and internal consumption. The GDP share of household debt has risen rapidly in the last few years. In 2014 this figure stood at 35.8 per cent, by 2018 it had grown to 54 per cent. This means that middle-income Chinese families will face increasing debt-servicing financial pressure in the next few years, leaving less money for domestic consumption.

Finally, even if the cities are more accommodating of migrant workers, and even if those workers have money to spend, the workforce may not be as mobile as it was in the 1980s, 1990s and 2000s. Official data shows that China’s working-aged population (those aged between 15 and 64) peaked in 2009 and began to shrink thereafter. At the same time the proportion of elderly people in the population has been increasing. In 2017 the number of people aged 65 or above increased to 11.4 per cent from 10.8 per cent in 2016. Thus in the next few years there may be fewer people moving to urban areas simply because the working-age population is stagnating.

So what does this mean for China’s future economic growth? The South China Morning Post thinks that “we should take a cautiously optimistic view of the economic boost that urbanisation can bring to China in the near-term at least.” However, it seems unlikely to assume that it will solely drive future economic growth for China in the future.

Marcus Roberts is co-editor of Demography is Destiny, MercatorNet's blog on population issues.