Friday, November 14, 2008

China Prepares for Urban Revolution

China Prepares for Urban Revolution

No doubt Beijing's massive $586 billion stimulus package, announced with much fanfare on Nov. 9 (, 11/9/08), is aimed at combating China's slowing economy. But even as growth continues to show signs of weakness—on Nov. 11 China reported 4.6% consumer price inflation growth, the slowest in 17 months—there is an equally compelling reason for the planned huge expenditure: meeting the needs of the largest urbanization in human history.

The numbers are overwhelming: Over the next 17 years, 350 million rural residents (more than the entire U.S. population today) will leave the farm and move to China's cities. That will bring the Chinese urban population from just under 600 million today to close to 1 billion, changing China into a country where more than two-thirds of its people are city dwellers, says Jonathan Woetzel, a director in McKinsey's Shanghai office. The change will reverse China's centuries-old identity as a largely rural country. Thirty years ago, when China started modernizing its economy, more than 80% of Chinese lived in the countryside. And just six years ago it still was about 60%. Today China is just under 50% urban.

Roads, Rails, and Skyscrapers

The newly urbanized population will live in eight megacities, those with a population of more than 10 million, as well 15 big cities with populations between 5 million and 10 million. In addition, by 2025 China will probably have at least 221 cities with a population over 1 million, estimates Woetzel. That compares with 35 cities of that scale across all of Europe today. These new urbanites are expected to be a powerful booster of growth: Urban consumption as a share of gross domestic product will most likely rise from 25% today to roughly 33% by 2025. "Urbanization is the engine of the Chinese economy—it is what has driven productivity growth over the last 20 years," says Woetzel. "And China has the potential to keep doing this for the next 20 years."

Meeting the infrastructure needs of the newly expanded cities will be both a challenge and an opportunity. More than 5 billion square meters of road will need to be added and as many as 170 mass-transit systems built, providing potential lucrative business opportunities for the likes of Siemens (SI), General Electric (GE), and Caterpillar (CAT). More than 40 billion square meters of floor space will be built in 5 million buildings—with up to 50,000 skyscrapers above 30 stories among them. "The needs in this market just keep getting bigger and bigger," says Masahiro Yoneyama, chairman of Komatsu (China). Yoneyama expects Chinese sales of its hydraulic excavators, dump trucks, and forklifts to grow 30%, reaching $2.5 billion this year.

But Beijing is worried that urbanization could cause growing social unrest—particularly because up to half of China's urban population is likely to be migrants by 2030 predicts McKinsey, up from around 20% today. Already high prices for labor, fuel, and other commodities are affecting China's export economy—the sector that traditionally has provided the first job for China's urban migrants. And the situation is expected to get much worse as the world economy slips deeper into recession. "A rapid slowdown in export growth is in the making," warned Merrill Lynch (MER) in a Nov. 12 research report.

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