China's Urbanization Trajectory and Economic Phases

Key Insight

China's urban population share dramatically increased by 36 percentage points between 1978 and 2013, a rate double the average for other developing countries during that period. While rapid, this growth is not entirely unique; the Soviet Union urbanized similarly, and South Korea saw a shift from three-quarters rural to three-quarters urban between 1955 and 1990, though this involved a much smaller increase of 26 million people compared to China's two-year urban growth. Despite this immense urban expansion, China remains less urbanized than most countries at its income level. The rural population peaked at 860 million in 1995 before declining to 630 million, indicating that China's urbanization process is estimated to be only about two-thirds complete, assuming it eventually stabilizes at around three-quarters urban.

Urbanization and economic growth correlate through three phases. The first, or 'magnet' phase, occurs during industrialization as factories in cities offer wages higher than subsistence agriculture, drawing rural populations to urban centers. This transfer to more productive modern sectors significantly contributes to faster economic growth; in China, it accounted for up to one-fifth of GDP increase between 1979 and 1997. The second, or 'building-binge' phase, emerges when the need for housing and infrastructure for the growing urban population itself becomes a direct economic growth driver. Construction creates new employment and stimulates demand for basic materials like steel and cement, though this growth is of lower quality as it does not inherently generate large productivity gains.

The third phase is the 'smart city' stage, where dense concentrations of skilled workers in cities foster knowledge networks, leading to specialization and productivity growth in specific industries. Examples include London and New York for finance, Los Angeles for entertainment, and Silicon Valley for technology. A study found that half of global economic growth now originates from the 300 largest metropolitan areas due to such specialization. China's urbanization initially focused on the 'magnet' phase in the first two decades of reform. After 1998, it transitioned to the 'building-binge' phase, marked by an annual urban population increase from 12 million to 21 million between 1998 and 2013, housing market privatization, and government-supported infrastructure. China's current challenge is to move into the 'smart city' phase, as the 'building-binge' has plateaued, with housing construction peaking and annual infrastructure build-out no longer needing to increase.