BEWARE CHINA´S URBAN LEGENDS / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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JULY 31, 2011, 1:28 P.M. ET.

Beware China's Urban Legends .
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By TOM ORLIK

Urbanization is a cornerstone of China's development strategy. But the relationship between a growing urban population and a sustainable growth path isn't as straightforward as many investors believe.


China's urbanization, and its beneficial effect on growth, is taken as an article of faith.


Concerned about a Japan-style collapse in China's property sector? Don't worry, a growing urban population underpins demand for apartments. Worried about China's overreliance on investment as a driver of growth? Fear not, a growing army of city slickers will have higher incomes and consume more.


The trend in the official data appears clear enough. China's urban population has grown from 19% of the total in 1980 to 50% in 2010. That is still some way off an urbanization ratio above 70% in many developed countries, so there is more to come. Urban per capita disposable income in 2010 was more than three times income in rural areas, and 86% of retail sales came from urban areas, so the transition to city life should support higher levels of consumption.


But as is often the case with China's data, not all is what it seems. The crucial point is that rural residents can move to the city, but without an urban residence permit—known as an urban hukou—they are confined to the margins of city life. According to Professor Kam Wing Chan, an expert on China's urbanization at the University of Washington, the share of China's population that has urban residence rights is around 35%, substantially below the 50% of the population that live in the cities.


The 171 million migrant workers who fall into that hole have an average wage of around $3,600 a year, compared with an average of $5,700 for registered urban workers. That is more than they earned in the countryside. But although they might have built China's glittering new residential compounds, living in dormitories in twilight zones on the edges of the city they are hardly likely to buy an apartment in one of them.


As important, the line between rural and urban hukou status is difficult to cross. The children of migrant workers are still excluded from the mainstream of the urban education system, and marginalized in urban labor markets, even though they were born and grew up in the city. They are more likely to be a source of social unrest than a catalyst for shifting China's development model.


China's move toward a more urban society is real. But without reform to the hukou system to bring migrants into the mainstream of urban opportunity, a bigger city population won't be the straightforward driver of consumption growth that many take as a given.