By 2030, Morgan Stanley forecasts the average size of China's five supercities will reach 120 million and the country’s urbanisation rate will rise to 75% driven by three initiatives – city clusters, smart cities and agricultural modernisation.
Philosophers, policymakers and academics have debated the optimum size of cities since Aristotle walked the streets of ancient Athens. Simply put, cities that are too small lack the labour and efficiencies to power economic growth, and those that are too large become expensive to manage, as efficiencies break down under the weight of overcrowding and decaying infrastructure.
China obviously has no problem with cities being too small. But where does it stand with respect to the latter problem now that 60% of the population lives in urban areas, up from a mere 18% in 1978?
Despite the substantial economic success of urbanisation as China initiated reforms and opened up over the past four decades, certain bottlenecks are showing the limits of the old growth model. These include big-city problems such as traffic congestion, social issues, pollution, and policy constraints on labour mobility.
China is ageing and its working-age population has started to decline in absolute terms. The country’s productivity growth has almost halved, to 2.3% annually in 2010-18 from 4.4% in 2000-09. More recently, globalisation has been hampered by tariffs and other barriers. Can China maintain a relatively fast pace of growth amid the challenges of slowing globalisation and ageing demographics?
Morgan Stanley Research believes the answer to these challenges is a new phase of urbanisation.
The country's urbanisation rate is predicted to rise from 60% today to 75% by 2030, with the second phase of urbanisation attracting an additional 220 million city dwellers. Half of them will settle in the top five superclusters, which are projected to have populations of 120 million on average – close to the size of Japan's current population.
Defying structural headwinds from slowing globalisation and ageing demographics, China's next leg of urbanisation – underpinned by the following initiatives – could help sustain productivity growth:
- City clusters, knitted together by the country's advanced rail system, could continue to reap the benefits of urban agglomeration while alleviating big-city problems. Five key city clusters across the country will likely account for 75% of GDP growth and half of the urban population increase in 2019-30.
- Smart cities that leverage technologies like 5G, cloud, big data, the Internet of Things (IoT), and artificial intelligence (AI) could help reduce traffic, crime, pollution, and improve the quality of city life, greatly enhancing the capacity of the cities of tomorrow.
- Agricultural modernisation through land reforms and the wider adoption of smart farming could boost labour productivity, enabling more rural workers to migrate to cities. China's agricultural labour productivity is expected to more than double over the next decade, freeing up more of the rural population for further urbanisation.
Overcoming hurdles to urbanisation will require structural reforms, including the freer flow of labour, better social welfare coverage, and larger-scale farming. Meanwhile, technology can also help enhance liveability in densely populated cities and boost productivity growth.
China has experienced unprecedented urbanisation and economic growth in just a few decades. In its next stage of development, however, China is focusing on making cities faster, safer, greener and more livable.
By 2030, city residents should generally be able to reach their workplaces within 15 minutes. At home, 5G-enabled smart appliances will be able to clean, cook and order food when supplies run low, while virtual reality headsets will help students do homework and attend online tutoring classes with the country's top teachers.
Much of this is a reality today. It is already common to pay at grocery stores in Hangzhou or check in at the new Beijing airport using only facial recognition. By 2030, greater changes will be enabled by investments in digital infrastructure and the adoption AI and big data. We expect high-speed commuter trains, smart traffic control systems, shared mobility, and automated vehicle technologies to cut travel times and make streets and roads safer than ever, while electric vehicles and green energy sources reduce pollution.
Morgan Stanley identifies three key investment opportunities from the next phase of urbanisation for China, as disruptive technologies unleash further growth potential:
- Transition from consumer to industrial internet: 5G infrastructure, public cloud, Internet of Things (IoT) devices, and software.
- Digitalisation of old-economy industries: Electric and autonomous vehicles, smart grid and utilities, market-oriented banks and insurers, and smart farming.
- New lifestyles in smart supercities: E-commerce, smart home appliances, online tutoring and vocational education, healthcare, and railway construction.
In Morgan Stanley’s view, China is poised to be the global leader in smart city and city cluster development.
Data-driven smart cities are expected to accommodate larger populations, lifting China's number of megacities, with populations similar to or larger than New York City, to 23 by 2030 compared to 9 today.
Morgan Stanley Research believes the pace of smart city growth in China will be faster than in many other countries, given government efforts to boost the development of fibre networks, 5G, big data, AI, and edge computing.
To ensure the success of city clusters, additional policy reforms will likely enhance regional integration, with more extensive transportation networks to foster a 'one-hour living circle' within clusters, and smart logistics systems to improve mobility.
Ultimately, the second phase of urbanisation for China is forecasted to bolster productivity growth and double the per capita income to US$17,800 by 2030, which surpasses the high-income threshold.
For more on China’s economic growth, or a copy of our full report ‘The Rise of China's Supercities: New Era of Urbanization’, speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.