Sustaining High Growth

After six years of weighing the options, China is now firmly committed to implementing a new growth strategy. At least, that's the message from the just-completed annual China Development Forum, one of China's most important dialogues with the outside world.

There were no surprises in the basic thrust of the strategy: a structural shift in China's investment- and export-led growth model toward a more balanced consumer-based and services-led economy. Such a transformation reflects both necessity and design.

It is necessary because persistently weak global growth is unlikely to provide the solid external demand for Chinese exports that it once did, but it is also essential, because China's new leaders seem determined to come to grips with a vast array of internal imbalances that threaten the environment, widen income inequality and exacerbate regional disparities.

The strategic shift is also a deliberate effort by Chinese policymakers to avoid the dreaded middle-income trap, a mid-stage slowdown that has ensnared most emerging economies. Developing economies that maintain their old growth models for too long fall into it, and China will probably hit the threshold in 3 to 5 years.

Three things from this year's China Development Forum deepened confidence that a major structural transformation that will enable China to avoid the middle-income trap is now at hand.

First, a well-articulated urbanization strategy has emerged as a key pillar of consumer-led rebalancing.

Urbanization was emphasized by Vice-Premier Zhang Gaoli in the forum's opening remarks and again by Premier Li Keqiang at the closing, and considerable details were provided in many of the working sessions. Urbanization is a building block for consumption, because it provides powerful leverage to Chinese households' purchasing power. Urban workers' per capita income is more than three times higher than that of their counterparts in the countryside.

The urban population in China reached 52.6 percent in 2012, up from 18 percent in 1980, and it is expected to rise toward 70 percent by 2030. If ongoing urbanization can be coupled with job creation, a distinct possibility because of China's emphasis on developing its embryonic labor-intensive services sector, the outlook for household-income growth is quite encouraging.

The pace of urbanization should dispel Western doubts stemming from concerns over so-called ghost cities and chronic over-investment. According to research by the global management consulting firm McKinsey & Company, with the annual influx of new urban residents totaling 15 to 20 million, China will need more than 220 large cities - at least one million inhabitants each - by 2030, up from 125 in 2010.

Moreover, because urbanization is a capital-intensive endeavor and China's capital stock per worker, a key driver of productivity growth, is still only 13 percent of the levels in the United States and Japan, China will remain a high-investment economy for years to come.

What is new today is the focus on urbanization's negative externalities, especially the thorny issues of land confiscation and environmental degradation. A well-developed "eco-city" framework was presented at this year's forum to counter both concerns. It features incentives to promote a new urbanization model, one that stresses compact land usage, mixed modes of local transportation, lighter building materials, and non-carbon energy sources.