The communique issued after the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) on November 12 was striking because it raised a question about what a China wherein the majority of the people lived in urban areas would look like.Kerry Brown, Executive Director of the China Studies Center at the University of Sydney, believes that future growth must harness China’s growing ranks of urban consumers. Excerpts of his thoughts follow:

The new leadership in place in the Party since November last year and in their government positions as of March this year have spoken a great deal about the issue of urbanization. This plenum has given two ideas about how accelerated urbanization might occur. One is to address the household registration system, so that there is more parity between rural and urban dwellers. The second is to steer China toward a service sector orientated economy, and at the heart of that is the drive to build a strong finance sector.

The urban sprawl

Most feel that China’s urbanization process has been rapid and extensive. In 1978, at the start of the reform and opening-up process, only 15 percent of people lived in cities. The agricultural component of the economy was over a third. One of the most important effects of the reforms from that year was to improve productivity in the agricultural sector through granting farmers rights to sell surplus crops to the state for a profit. This freed up surplus labor and led to the innovation of the “town and village enterprises,” a hybrid vehicle for pursuing non-agricultural related economic goals.

In the 2010 national census, the survey returns showed that China was now effectively a society in which, for the first time ever, as many people lived in cities as in the rural areas. This followed a global trend. But it raised the question of what specifically an urban China might be like. Over 250 cities now exist in China, each having more than 1 million residents. Cities like Shanghai have exploded from 10 million residents in the early 1990s to approaching 25 million today. In any week, 12,000 new dwellers arrive in the city, creating challenges for infrastructure, welfare, employment and social cohesion. This is a pattern repeated, to varying degrees, across the country.

The plenum communique underlines the fact that the path to a more urban China is not one that the country can ignore. The sort of higher value, more service-sector orientated economy that Premier Li Keqiang has referred to in many of his statements and speeches is one which will inevitably be urban. Fast sustainable growth must come from urban areas, meaning that rural areas will be able to produce more food, introduce more mechanization in the agricultural sector, and maintain more land for produce so that China’s food security challenges can be met in the coming decades.

An urban China, one where as many as three quarters of the population live in cities, will be a radical break from the past. The great sociologist Fei Xiaotong (1910-2005) wrote in 1947 that Chinese society remained agrarian in its structures, a world where people lived in tight knit communities in which everyone was known and the bonds of trust were strong. In 2013, Chinese society is no longer like this. The change has been profound and rapid. More and more Chinese live in communities in which they were not born. They are amongst the most mobile people on the planet, with perhaps 200 million migrant laborers making a cohort of people who live for extended periods away from their rural homes in urban settings. An urban China, as the plenum made clear, will need to have a flexible labor system, and one where residency rights will be easily transferable. It will be a China in which those who live in cities will have access to public goods on the same level as natives of the place they have moved to. That will mean that local governments will have great challenges in providing public goods to incomers, including medical care, education and social security. There will need to be adjustments to how this is funded through a tax basis. All of these issues have been widely debated in China over the last two decades as the urbanization process has accelerated, but there will now need to be a consensus on the best administrative structures and policy instruments by which to satisfy the expectations and the challenges of a newly urbanized Chinese citizenry.

This leads to the second issue: What economic structure might an urban China have? The plenum communique refers explicitly to the need to create a strong finance sector. The service sector proportion of China’s GDP at the moment is 46 percent. In a developing economy, this is 10 percentage points higher, at 56 percent. In a developed economy, it is as high as 80 percent. Increasing service sector levels has been a clear part of the government’s strategy to create new spaces for growth for a number of years. Finance is a critical part of the service sector. There is another dimension to this. An urban China is also one where another of the structural challenges that China now faces becomes more soluble - and that is the increased consumption. Consumption remains only a third of GDP, compared to over double this in a developed economy. An urban China is a China where consumption is likely to increase, and where the consumers at the heart of this are likely to become users of services.

Factoring in finance

Finance is a complex sector to develop. The suggestion in the plenum is that building a finance sector in China will be incremental, and that the starting point will be centers like Shanghai and Tianjin. Shanghai has already opened a pilot Free Trade Zone, where trading of Chinese currency might become possible. It is also clear that in Shanghai with the international finance center established there in the last decade, there is the conceptual framework for a finance sector which will be able to serve the huge domestic market. Finance will be the provider of good quality new jobs, and the sort of high quality growth that this government is clearly aiming for.

An urban China brings challenges, however. Having such a vast group of people move into cities will create sustainability issues. Water provision is one of the key issues with the water table in major cities like Beijing now at critically low levels. Pollution from industry and cars will also be a massive issue. Shanghai registered 2 million cars for its roads, but was able to build a huge new subway infrastructure, much of it before the Shanghai Expo in 2010. Beijing currently has the second largest subway system in the world after Seoul in South Korea. Even so, with 5 million registered cars, roads are often clogged and car-related pollution high. Cities will need to become spaces for social and architectural innovation, because never before have the pressures on their infrastructure and sustainability been so high. The impact of this on people’s lifestyles, on their diets, on their relationship with each other, will be very profound. In many cities, the majority of people will be newcomers, meaning that a sense of community and shared civic values will be important.

An urban China, as it is outlined through this plenum, also creates opportunities for the outside world. Seeing Chinese now increasingly as potential users of services, as consumers who are keen to buy Western goods, and as partners in unlocking the enormous growth potential in China is clearly sensible. China as a manufacturing base and an exporter is likely to be replaced in the decade ahead by China as a customer, a service user, and a huge new market for technology and value-added consumer goods. The plenum communique with its vision of an urban China and the routes to achieve that is also a statement that multi-national companies need to think of strategies by which they engage in this process. Research produced in Europe recently has shown that Chinese consumers in cities are information hungry, open minded (there is little of the “buy local” mentality that sometimes dominates Western markets - the issue is buying good quality, reliable goods) and price conscious. For companies in the rest of the world to start reaching these new consumers living in cities in China is a fresh challenge, but one which will almost certainly be important.