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What is China's common-prosperity strategy that dates back to the 1950s?

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President Xi Jinping's rhetoric on common prosperity, which calls for citizens to share in the opportunity to be wealthy, has surged this year - long after being first mentioned by former leader Mao Zedong in the 1950s.

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BEIJING - Chinese President Xi Jinping emphasized at a finance and economic meeting Tuesday the need to support moderate wealth for all - or the idea of "common prosperity," which analysts have said is behind the latest regulatory crackdown on tech companies.

Significantly, the meeting was the first Xi led publicly since a two-week quiet period. Chinese leaders typically spend early August in secret political discussions at a resort in Beidaihe, about a three hours' drive east of Beijing.

The meeting called for the "reasonable adjustment of excessive incomes and encouraging high income groups and businesses to return more to society," state media said in Chinese, according to a CNBC translation.

Leaders also specified common prosperity does not mean prosperity for just a few and is not a form of equal distribution, state media said. Rather, progress toward the goal would occur in stages, the report said.

Delivering "common prosperity" has emerged in recent months as an underlying theme of Chinese political discussion. The term is generally understood as moderate wealth for all, rather than just a few. But it remains a vague, frequently used slogan.

Yue Su, principal economist at The Economist Intelligence Unit, said in a statement she expects authorities to be pragmatic in implementation.

"Considering that raising taxes on high-income groups and capital returns may curb investment and potentially lead to capital outflows, the Chinese government will not completely ignore the impact of redistribution policies on the economy," she said.

She added that privatization will likely slow in public services such as education, care for the elderly or medical care, with authorities at the very least becoming more strict in monitoring prices and affordability.

Income inequality among China's 1.4 billion people has increased over the last few decades. The top 10% of the population earned 41% of national income in 2015, up from 27% in 1978, according to estimates published in 2019 by Paris School of Economics professor Thomas Piketty and a team.

But the lower-earning half of the population has seen its share of national income fall to about 15%, down from about 27% in 1978.

This year, urban residents in the coastal city of Shanghai had an average per capita disposable income of 7,058 yuan ($1,091) a month, far higher than the 4,021 yuan for those in cities nationwide, and well above the 1,541 yuan for rural residents, official data showed.

The Chinese government has claimed it eliminated extreme poverty in the country as of the end of last year. That marked a first step to fulfilling the longer-term pledges of the ruling Chinese Communist Party, which celebrated its 100th anniversary in July.

"Elaborating on the 'common prosperity' objective, China has affirmed its effort to rebalance the economy toward labor, tackling social inequality with redistribution, social welfare, taxes and inclusive education," Morgan Stanley analysts said in a report distributed Wednesday, noting a target - "to increase the middle-income group's share of the economy."

Based on the top economic policy meeting, the analysts said they expect additional measures to support economic growth, such as a cut to the reserve requirement ratio.

Data for July showed China's economic growth slowed more than analysts' expected, including figures on spending by individual Chinese consumers.

However, economists have noted that growth is not as important for Beijing this year as tackling long-term problems such as a buildup of debt and risks in the vast real estate market.

"Finance is the core of the modern economy, with ties to development and security," CNBC's translation of state media said, citing Xi's remarks at Tuesday's meeting. "It must follow the principles of marketization and the rule of law, and coordinate the prevention and resolution of major financial risks."

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China calls for curbs on 'excessive' income and for the wealthy to give back more to society

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BEIJING - Chinese President Xi Jinping emphasized at a finance and economic meeting Tuesday the need to support moderate wealth for all - or the idea of "common prosperity," which analysts have said is behind the latest regulatory crackdown on tech companies. Significantly, the meeting was the first Xi led publicly since a two-week quiet period.

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Whether it's the currency devaluation or the stock market rout, the economic news coming out of China seems unremittingly negative - and that's not to mention the horrific explosions in Tianjin.

But here's some good news. Yet-to-be-released data shows that China has all but eradicated urban poverty. For a country with huge numbers of poor people streaming into its cities, many of whom living initially in conditions of abject misery, this is an extraordinary success. It has been achieved, in large part, because of a government subsidy paid to urban dwellers to bring incomes up to a minimum level of 4,476 yuan ($700 or £446).

The data comes from the latest survey in the China Household Income Project (Chip) series and will not be formally published until next year. It shows that in 2013 the share of people living in cities below this minimum income line was just 1.6%, adjusted for purchasing power parity. According to Prof Li Shi, director of Beijing Normal University 's institute of income distribution who works on Chip, that's mostly accounted for errors in targeting by the government.

And it seems that the data is unusually robust: it is based on a behemoth household survey for which more than 100,000 families recorded their income and consumption every day for a whole year.

China has lifted more people out of poverty than anywhere else in the world: its per capita income in increased fivefold between 1990 and 2000, from $200 to $1,000. Between 2000 and 2010, per capita income also rose by the same rate, from $1,000 to $5,000, moving China into the ranks of middle-income countries. Between 1990 and 2005, China's progress accounted for more than three-quarters of global poverty reduction and is the reason why the world reached the UN millennium development goal of halving extreme poverty. This incredible success was delivered by a combination of a rapidly expanding labour market, driven by a protracted period of economic growth, and a series of government transfers such as the above urban subsidy, and the introduction of a rural pension.

The question now is whether the government can repeat this success and eradicate extreme poverty entirely: after all upto one person in 10 in the country remains poor. The current economic and social five year plan (the country's 12 th) aims to eliminate all poverty by 2020 (10 years ahead of the newly agreed U N Sustainable Development Goal poverty eradication target, and it seems likely that this target will be reiterated in the new five year plan to be agreed by the Chinese Communist party's central committee next year. If that's to be achieved, the government will need to keep up its expensive transfer programmes, even at a time of economic downturn.

In addition, inequality remains a big issue and will need to be tackled. Although China's Gini Coefficient for income inequality is improving from its 2008 peak of 0.491, it remained at a relatively high level of 0.473 in 2013. This is despite the government's record of progressive taxation, which has had a distributional effect, as well as raising money to fund transfer programmes. There are also significant gender and regional inequalities, meaning the government will need to do more to target women and people living in rural areas (as well as other groups such as disabled people) to ensure that no one is left behind.

And finally, equitable growth will of course also need to be the sustainable kind that cuts rather than increases carbon emissions - no small order for a country where air pollution kills an estimated 4,000 people a day.

Elizabeth Stuart is a research fellow at the Overseas Development Institute

Topics

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China has almost wiped out urban poverty. Now it must tackle inequality

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Whether it's the currency devaluation or the stock market rout, the economic news coming out of China seems unremittingly negative - and that's not to mention the horrific explosions in Tianjin. But here's some good news. Yet-to-be-released data shows that China has all but eradicated urban poverty.

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According to the results of the 2010 census, Shanghai's population was nearly 1,000,000 people more than had been projected by local authorities. The provincial level of jurisdiction grew from a population of 16.4 million in 2000 to 23.0 million in 2010. Shanghai is one of the world's fastest growing megacities (urban regions of more than 10 million population). Shanghai's 6.6 million population growth equals the strong growth of the Manila urban region over the same period but trails the 7.4 million growth in the Jakarta urban region. Shanghai modestly extended its lead over Beijing as China's largest urban region, where the growth over the same period was 5.8 million.

As is typical of urban regions around the world, Shanghai's population gain was concentrated outside the core, in suburban and exurban areas (see table at bottom). A map of Shanghai's districts can be seen here.

Suburban Growth: The nine suburban districts grew 69% between 2000 and 2010. The suburban areas grew from 9.5 million in 2000 to 16.0 million in 2010, adding the equivalent of the population of greater Toronto, Dallas-Fort Worth or the Rhine-Ruhr (Essen-Dusseldorf). The suburbs dominated growth, with 99.2% of the population gain

Sonjiang, to the west of Honquiao airport grew the most, adding nearly 150% to its population. Pudong, a huge district that extends from the new edge city development across the Huangpu River from downtown all the way to Pudong Airport on the Yangtze River added 1.9 million people and now has a population exceeding 5 million (Note).
Pudong Business District
Toward Nanjing Road

The Inner Core: The inner core is the all of the famous Bund, with its Western-style commercial architecture along the Huangpu River and Shanghai's best known shopping street, Nanjing road. The three districts of the inner core all lost population. Overall, the inner core population dropped from 1.209 million to 926,000, a decline of 23%. This may seem surprising, in view of the large number of high-rise condominium buildings that have been constructed in this area. However, these buildings typically replaced higher density low rise development that was generally not up to modern standards. The inner core has a population density of 119,400 people per square mile (46,100 per square kilometer), down from 155,700 per square mile (60,100 per square kilometer) in 2000. Even so, the inner core retains a population density more than 50% above that of either Manhattan or the ville de Paris.

The Outer Core: The six districts of the outer core gained 6%, increasing from 5.723 million to 6.060 million people. Two districts sustained minor losses and another three made modest gains. The district of Putuo was the exception, gaining 23%. The outer core districts had a population density of approximately 60,100 per square mile, or 23,200 per square kilometer in 2010.

Overall, the entire core grew 0.8% and accounted for 0.8% of the growth in the jurisdiction. The population density was approximately 64,000 per square mile or 25,000 per square kilometer.

Urban and Rural Shanghai: Overall, Shanghai covers approximately 2,445 square miles (6,333 square kilometers), a land area somewhat more than that of the Statistics Canada defined Toronto metropolitan area (2,279 square miles or 5,901square kilometers). However, Shanghai's population is nearly four times that of the Toronto area. Even so, Shanghai's rural population remains at approximately 3,000,000 people.

Based upon the new census count, it is estimated that the population of the urban area is approximately 20,000,000. The suburban areas, inside the urban area but outside the core are estimated to have a population density of 10,600 per square mile or 4,100 per square kilometer, well below the density of the core. Even so, this suburban density is well above that of all but a few of the urban areas of Western Europe. The suburban areas include a number of undeveloped areas that are completely surrounded by urbanization.

Decentralized Employment: Shanghai has also developed a decentralized employment base, despite having one of the world's largest central business districts, with 1.25 million jobs. By comparison, Manhattan has approximately 1,750,000 jobs south of 59th Street, while Tokyo has approximately 4,000,000 jobs inside the Yamanote Loop. The central business district has approximately 15% of Shanghai's employment.

Shanghai's Urban Expansion: Shanghai continues to expand in virtually every direction. It is likely that Shanghai's urbanization will mean that of Kunshan, an urban area of nearly 1.5 million people located in the Suzhou Prefecture of Jiangsu. In addition, the urbanization is also likely to soon meet that of Taicang, another urban area in Suzhou that has a population of approximately 500,000. At least one of Shanghai's Metro lines is planned to be extended to Taicang.

Shanghai's urbanization is also poised to spill across the border into the province of Zhejiang. Development is also spreading to the east and southeast in Pudong, including Lingang, which will eventually have 1 million residents. The ocean will prevent further expansion in this direction. Lingang is the point from which a 17 mile (28 kilometer) long bridge crosses one-half of Hangzhou Bay Bridge to Shanghai's new island port, the largest in the world.

Shanghai exhibits the same trends that are evident in other world megacities. Like Seoul and Mexico City, the inner core population density is falling. And like Jakarta, Mumbai, Manila and most other large urban areas in the world, the overall population density is declining even as population growth continues.

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Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life"
Lead Photograph: The Bund (all photos by author)

Note: Pudong includes the large Pudong business district, which is directly across the Huangpu River from the Bund in the central business district. However, Pudong is a relatively new development and was not a part of the urban core. Moreover, Pudong extends far to the east and southeast.

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According to the results of the 2010 census, Shanghai's population was nearly 1,000,000 people more than had been projected by local authorities. The provincial level of jurisdiction grew from a population of 16.4 million in 2000 to 23.0 million in 2010. Shanghai is one of the world's fastest growing megacities (urban regions of more than 10 million population).

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What Should We Understand about Urbanization in China?

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What Should We Understand about Urbanization in China?

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China's extraordinary economic boom has gone hand-in-hand with urbanization. In 1950 13% of people in China lived in cities. By 2010, the urban share of the population had grown to 45%; it's projected to reach 60% by 2030. Twenty-five of the world's largest 100 cities are in China.

Urbanization, in turn, is reshaping both the physical environment and the cultural fabric. Take, for example, the issue of pollution. Huge cities place huge demands on the environment, but high-density living conditions also present opportunities for improving efficiency of energy usage.

There are clear signs of the environmental challenge. When the coal-fired plants that provide heat to the 11 million citizen of the far northeastern Chinese city of Harbin came on for the first time this fall, air quality got so bad it created a whiteout that halted traffic, closed schools and shutdown the airport. Speaking on PBS Newshour, Evan Osnos of the New Yorker said that the environmental cost of China's rapid development is felt across the country. "People are losing their patience with it," Osnos said.

At the same time, there are efforts to raise environmental standards, including more than 80 low-carbon programs going on around the country. They include developing emissions inventories for carbon dioxide and other greenhouse gases, setting measurable emissions-reduction targets, establishing carbon emission trading platforms, and creating carbon intensity standards (that is, determining acceptable levels of carbon dioxide produced per unit of economic activity). Jonathan Woetzel, a director at McKinsey, explains the driver behind this push to create a new norm: "It costs a lot less to prevent a problem than to have to fix it later," he says. "The competition now is about finding those technologies that can increase productivity, be good for the environment, and deliver a high quality of urban life to the citizenry."

Yale Insights talked with Karen C. Seto, a China expert and professor of geography and urbanization at the Yale School of Forestry and Environmental Studies. While underscoring the unprecedented scale of China's urban explosion, she encouraged a nuanced view of what urbanization means to the country. "It's not that China cities are bad for the environment-or that they're all going to save the environment." She points to Zhongshan as an example of a city working to preserve its natural capital while developing, even as other cities appear to take an "anything goes" attitude.

Seto points out that different parts of China are at very different phases of development. The earliest-developing cities-including Shanghai, Beijing, Shenzhen, and Guangzhou-have the most educated and wealthy populations, but they are now competing with newly developed urban centers for businesses. While 20 years ago the coastal cities offered the best chance of economic success, "nowadays, there are factories and enterprises set up throughout the entire country, so there's a lot more opportunity around the entire country."
TRANSCRIPT Q: What are three things that everyone should know about urbanization in China?
Karen Seto: Okay so, three things that everyone should know about urbanization in China: One is the scale is just unprecedented, and I think for anybody who wants to study China or do business in China, I would say go to China. And don't just go to Beijing and Shanghai and Guangzhou. Go also to a second-tier city, because I think for someone who is entering the China market now, you're going there today, let's say for the first time, your image of Chinese cities and China's urbanization is-if you go to Beijing and stay in Beijing-your image is one of a large scale, very modern. And you have no comparison to understand and to contextualize where these people are coming from and the big change that they're undergoing. So, I would say the scale is so unprecedented that, in order to really understand it, you need to go to a smaller city. Take a plane ride and go west; head north. You don't actually have to go very far. Even if you ride the train out of Beijing about two hours, you'll at least get a very different sense of a second-tier city. So I think that's one thing, getting a better sense of the scale.

The other thing that I think everyone needs to know about China's urbanization is that it's a process that's still in transition. There are some cities that are undergoing a third phase of transition, a third phase of development. There are other cities that are just starting their urbanization process, and so you're going to be comparing apples and oranges. There are some cities where you're going to get a very large labor pool, very diverse labor pool, very educated labor pool, very sophisticated set of consumers. There's going to be another set of cities that are primarily a regional hub for rural migrants, and there you're not going to get the Guccis and kind of the fashion-forward, high-end consumer. You're really looking at people who are really trying to significantly improve their standard of living, make the jump from an agrarian economy over to manufacturing. So, I think it's important to understand that this urbanization process is still underway and that different cities are undergoing different urbanization transitions.

I think the third thing that's critical about China's urbanization that everyone should know is that it's not a black and white thing. It's not that China cities are bad for the environment or that they're all going to save the environment. There are clearly some cities that have-Zhongshan is a good example down in the south that has really done a very, very good job in trying to preserve the environment, preserve ecosystem services. Some of the cities that have been able to develop more slowly have been able to develop in a much more rational way in terms of, again, preserving the environment. Other cities have a much more "go west" or frontier feeling, and when we think about the "go west" feeling or the frontier landscapes, those are places where almost anything goes. And so, you have some cities that are growing slowly, more methodologically, and others that are "this is a boom town" feeling. And so, I think that the verdict is still out in terms of how urbanization will affect the environment and sustainability. But I think it's critical for us to understand that it's a very complex set of interactions and it's a fast-moving train or a fast-moving plane. I go to China two to three times a year, and even in my field sites when I go back, places are constantly changing. It's a very dynamic place.
Q: How much are trends in China's rapidly growing cities setting the agenda for the country?
Seto: Urbanization is driving economic development in China. There's no doubt that what will happen in the cities will have a huge impact for economic well-being for the entire country. You probably saw that the Chinese government recently indicated that urbanization is one of their top agenda items in the next ten years, and clearly they see urbanization as the pathway to lift millions of people out of poverty. And historically, if you look at the relationship between a country's urbanization level and its GDP, there's a very strong relationship between what percentage of the population is engaged in agriculture and the country's per capita GDP. And it's very clear that what happens in Chinese cities will be really critical for how the country develops economically and in terms of environmental sustainability.
Q: What is the relationship between globalization and urbanization in China?
Seto: So, if you look at the cities that grew the fastest during the first wave of China's urbanization-so this is, again, in the '70s and '80s-those were the cities that were designated as the special economic zones by the central government. So, these were places that were laboratories for different, new types of economic policies, and those are places that developed rapidly. We had a big influx of investments from overseas investors, and those are places where we can see the expansion of factories, of housing, of roads, etc. So, you can think of those cities as having a head start over all the other cities. These special economic zones had a head start in terms of economic development. They were the ones where they had the relationships with the overseas investors, FDI. And that really set, I would say, a precedent in terms of establishing managerial expertise, relationships with foreign investors, and also really incubating a local set of local knowledge and local know-how. But now all of China, in many ways, can be thought of as a special economic zone. If you go to any major city, any provincial capital in China, you're going to see foreign nationals, you're going to see foreign companies, but they're primarily concentrated still along the coastal regions.

In the interior cities, we see a lot more of the domestic investments. There are foreign companies that are moving into the western areas. The central government had a policy about a decade ago called the Go West policy, which was to try to shift investment towards the west. We see that. We see that in the economic data. We see that in terms of the impacts on urban development. But you can imagine places like Shanghai and Beijing have a lot of connections, a lot of bilateral connections, in a way that an interior city like, let's say, Wuhan or even Chengdu may not have. But what we're seeing in those western cities is a lot of the more locally grown-a lot of the domestic companies are in those places.

One of the things that I think is a challenge for many companies operating in China now certainly is the increase in labor costs. So the cities like Shenzhen, Guangzhou-the cities that developed the fastest-those are the places where the labor costs are also the highest. Those are the places where you're going to go and see really nice housing stock, you're going to see the Prada shops, you're going to see the Gucci shops. And those are places where you're not going to find the factory workers, or very few of them. And so, we're seeing the shift of, let's say, manufacturing-based development moving more inland into the country.

It's very difficult to get workers to migrate long distances to go to the south anymore. Twenty years ago, it was the only game in town, and so workers from all around the country really migrated and flocked to these coastal regions. But nowadays, there are factories and enterprises set up throughout the entire country, so there's a lot more opportunity around the entire country and certainly in the western regions as well.
Q: How does urbanization affect where Chinese companies locate?
Seto: Well, it depends on what your business does, right? And so if your business requires really highly educated, maybe, services-high levels of technical know-how, I think that there certainly is a much larger labor pool in these established first-tier, provincial-level cities. If you're a nuts and bolts widgets kind of company and you can train everybody that you want to hire, I think you probably don't need to be in a Beijing or a Guangzhou or a Chongqing. You can probably go to a second-tier city. Labor costs will be significantly lower. And you have to remember that even though China's urbanization levels are really high, there is still a very large percentage of its population that is living in the countryside and living in much, much smaller towns. And so, setting up shop in a smaller town, you're a big fish in a small pond, as opposed to going to a place where you're competing with the Dells and Ciscos and SAPs and all the other global international companies. Not to mention the growing number of Chinese homegrown companies as well.

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What Should We Understand about Urbanization in China?

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China's extraordinary economic boom has gone hand-in-hand with urbanization. In 1950 13% of people in China lived in cities. By 2010, the urban share of the population had grown to 45%; it's projected to reach 60% by 2030. Twenty-five of the world's largest 100 cities are in China.

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Geographers who have studied the growth of China's cities over the past four decades tend to sum up the pace of change with one word: unprecedented. In 1960, about 110 million Chinese people-or 16 percent of the population-lived in cities. By 2018, the numbers had increased to 820 million and 59 percent. (For comparison, the entire population of the United States was about 330 million people as of December 2019.)

The surge in urbanization began in the 1980s when the Chinese government began opening the country to foreign trade and investment. As markets developed in "special economic zones," villages morphed into booming cities and cities grew into sprawling megalopolises.

For more than four decades, Landsat satellites have collected images of Shanghai. This series from Landsat 5, 7, and 8 shows the city's growing footprint between 1984 and 2019. Developed areas appear gray and white; farmland and forests are green; shallow, sediment-filled water is tan.

In 1984, the core of the city was centered on the west bank of the Huangpu River, a manmade tributary of the Yangtze River. Since then, Shanghai has expanded in all directions, filling in what had mainly been farmland with new housing, factories, shopping, parking lots, and roads. Pudong, the once rural district west of Huangpu River, now has a population approaching 6 million people and is home to some of Shanghai's tallest and most iconic buildings.

According to one analysis of Landsat imagery, Shanghai had 308 square kilometers (119 square miles) of urban area in 1984. By 2014, the number was 1,302 square kilometers (503 square miles). The core of the city has radiated outward over the decades, but a ring of surrounding towns also expanded and merged with Shanghai. The most rapid expansion occurred between 2000 and 2004, when the city added 243 square kilometers of urban area.

As a point of reference, note the location of Hongqiao International Airport. In 1984, it was bordered by farmland on the westernmost outskirts of the city. Two decades later, development had completely surrounded the airport, which also expanded significantly during that period.

The airport was not the only transportation hub that got an overhaul. Shanghai's port, which handled less than 1 million twenty-foot equivalent units (TEUs) in 1985, transported more than 42 million TEUs in 2018-enough that it had surpassed Singapore to become the world's busiest port for container ships.

Though Shanghai's story has mainly been one of urbanization and paving over open spaces, the images do reveal some signs of greening. Note, for instance, the pentagon-shaped greenway that becomes visible in the 2004 image. The greenway is part of a network of parks and forested areas built around a major highway (S20). City planners established the greenway as part of a broader attempt to give residents some access to green spaces.

The composite images below show how the wider region along the Yangtze River Delta has expanded since 1984. Note how neighboring cities like Suzhou and Wuxi have slowly merged with Shanghai to create one continuous megalopolis.

Unlike the images at the top of the page, each of which captures one day roughly every five years, these "best-pixel mosaics" are made up of small parts of many images captured over five-year periods. The first image is a mosaic of scenes captured between 1984 and 1988; the second shows the best pixels captured between 2013 and 2017. This technique makes it possible to strip away clouds and haze, which are common in Shanghai.

Just as Shanghai has expanded rapidly in recent decades, so have towns and cities in the broader Yangtze River Delta. A 2015 World Bank report noted that 7,734 square kilometers in the Yangtze River Delta Economic Zone-which includes Shanghai, Suzhou, Wuxi, and several other cities-became urban between 2000 and 2010. That is an area equivalent to 88 Manhattans. During that period, population in that zone increased by 21 million people.

The rapid pace of development has changed Shanghai's natural ecosystems, particularly its wetlands. Research shows that sea level rise, erosion, dredging, and the construction of water storage infrastructure have all contributed to wetland loss. The creation of new coastal land-by piling sediment onto tidal flats in a process called land reclamation-also had a major impact on wetlands, destroying them in some areas and creating them in others. In the mosaics, note the new land that emerges along the eastern side of the islands and along the nose-shaped peninsula.

Replacing forests and farmland with concrete has raised the city's temperature-a phenomenon known as the urban heat island effect. Chinese researchers working with thermal sensors on Landsat showed that the parts of Shanghai with elevated temperatures increased 81 percent between 1984 and 2014, though they also found that urban greening efforts had slowed the growth of heat islands.

Despite the dizzying pace of urbanization, there are signs that Shanghai's growth is tapering off. In recent years, officials have said that they will cap the city's population at 25 million in the hopes of easing the pressure on the environment, the infrastructure, and city services.
Editor's Note: In the series of images at the top of the page, there are slight differences in the color of the vegetation, the river, and the city. Since the images were taken over three decades by three different sensors, achieving a perfect color match is not possible.

1. References

2. Atlas of Urban Expansion (2015) Shanghai. Accessed December 9, 2019.

3. The Atlantic (2016, August 7) 26 Years of Growth: Shanghai Then and Now. Accessed December 9, 2019.

4. Cui, L. & Shi, J. (2012, December) Urbanization and its environmental effects in Shanghai, China. Urban Climate, 2, 1-15.

5. New Geography (2019, March 27) Beijing and Shanghai Limit Population Growth. Accessed December 9, 2019.

6. The World Bank (2015) China: Urban population (% of total). Accessed December 9, 2019.

7. World Bank Group (2015, January 26) East Asia's Changing Urban Landscape: Measuring a Decade of Spatial Growth. Accessed December 9, 2019.

8. World Shipping Council (2019) Top 50 World Container Ports. Accessed December 9, 2019.

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Geographers who have studied the growth of China's cities over the past four decades tend to sum up the pace of change with one word: unprecedented. In 1960, about 110 million Chinese people-or 16 percent of the population-lived in cities. By 2018, the numbers had increased to 820 million and 59 percent.

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The human impacts of China's new urbanisation

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The human impacts of China's new urbanisation

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The human impacts of China's new urbanisation

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In the first of a two-part series, photographer Justin Jin chronicles China's ambitious plans to move 100 million farmers into the cities that are being built over their fields

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Environmental impact of Beijing's urbanisation

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Environmental impact of Beijing's urbanisation

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With Beijing's dense population and smoggy skies, it stands to reason that the Connecticut-sized city would be radiating an outsized environmental impact. But until now, we weren't clear on just how bad it was.

Researchers from NASA and Stanford University recently estimated that the area directly affected by Beijing's urbanization has quadrupled in size from 2000 to 2009. So while the area we call Beijing has remained roughly the same size, its environmental influence has grown far larger. These findings, published this week in the Journal of Geophysical Research: Atmospheres, draw on new computer models and data from NASA's QuikScat satellite.

From 2000 to 2014, Beijing's population grew from around 11 million to 21 million-today packing as many people into one city as there are in all of Australia (or North Korea or Syria). Strangely, the study didn't measure the effect of more greenhouse gas emissions released by these additional residents and their vehicles. Instead, it only measured the growth of physical infrastructure-for instance, new roads and buildings.

The changes in the city's physical infrastructure had massive, compounding effects on its weather and climate. New roads, for instance, reduce the ground's albedo, its ability to reflect light and heat away from the city, and buildings prevented air from circulating freely. Those effects have resulted in higher temperatures and lower wind speeds. Researchers found that winter temperatures had increased in the city by 5 to 7 degrees Fahrenheit, while wind speeds were reduced by about 2 to 7 miles per hour, making the city air even more stagnant, according to the American Geophysical Union.

While Beijing is hardly the only major city dealing with these issues, the sardine-packed capital of China has become the poster child for out-of-control urbanization. Recently, its government has taken steps to curb its pollution and greenhouse gases, vowing to clean up more than 1,000 festering landfills and promote hybrid and electric vehicles. Unfortunately, neither will have much of an impact on the changes being wrought by the immense growth of its sheer physical infrastructure.

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Urbanization in Sardine-Packed Beijing Has Quadrupled the Size of Its Environmental Impact

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With Beijing's dense population and smoggy skies, it stands to reason that the Connecticut-sized city would be radiating an outsized environmental impact. But until now, we weren't clear on just how bad it was. Researchers from NASA and Stanford University recently estimated that the area directly affected by Beijing's urbanization has quadrupled in size from 2000 to 2009.

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With the release of the " National New-type Urbanization Plan" by China's State Council in March, it appears that China's leadership is betting that urbanization can be a main driver of the country's economic growth, as the government attempts to shift away from an investment-based economy. The plan has attractive extensive media coverage, which has emphasized that it calls for relaxing restrictions on access to urban household registration, or hukou, and that urbanization could be a way to boost China's domestic consumption, which has remained consistently low.

This idea that increased urbanization could help the economy was included in China's five-year plan in 2011, and it is normally associated with the new leadership who came to power in 2013. China's second-in-command, Premier Li Keqiang, was giving speeches and releasing policy papers advocating for a new urbanization program in the years before he and President Xi Jinping came to power. Setting the stage for formal proposals like the State Council's new plan, Li argued in 2012 that since urban people had higher incomes and consumed more and because China was still under-urbanized when compared with developed countries, "every rural person who becomes an urbanite can increase consumption by more than 10,000 renminbi ($1,600)."

While the rhetoric of promoting urbanization has been around for a few years now, for China watchers, it is odd to witness the Chinese government pinning its hopes for growth on increased urbanization. For decades, the distinctive feature of China's urbanization model has been its bias against settling rural-to-urban migrants in the cities, a bias created via the hukou system. While other developing countries accumulated slums and squatter settlements around their cities, China's policymakers did their best to make urban spaces as unwelcoming as possible to potential permanent migrants by keeping migrants' access to local public services severely restricted.

In 2014, more than 200 million Chinese migrant workers live in places where they are not registered and are thus legally excluded from some local public services, although not every city's policy is equally restrictive. This means that there are millions of children of urban workers who live in rural areas apart from their parents because they are legally excluded from the schools in the city. Likewise, many migrants must return to their home villages for health care because they have limited access to these services in the places they live and work.

In the context of a country where cities apparently cannot support even the migrants who have already arrived, it seems surprising that the Chinese government would expect increased urbanization to be the key to future growth. The solution to this apparent paradox is that China's government has no intention of opening up the big cities to urbanization. Instead, the State Council plan stated that China would "comprehensively open" small towns, "methodically open" small cities with fewer than one million people, "reasonably open" bigger cities with one to three million people, "reasonably determine" the population for cities with three to five million people, and "strictly control" the megacities with more than five million people.
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The meaning of this bureaucratese is that at least the twenty biggest cities would be either "strictly controlled" or "reasonably determined," hardly a radical departure from the current hukou regime. For years, migrants have been able to easily acquire urban hukou in most poor small towns, but why would they want to?

True, the document does say its objective includes "not just opening up small cities, but also relaxing restrictions in larger and medium-sized cities," but China's cities have been slowly becoming more migrant-friendly for at least a decade, and the urbanization plan does not seem like a catalyst for accelerating this process. Even if the new urbanization plan works perfectly, the State Council document predicts that in 2020 there will still be 100 million migrant workers living in cities without urban hukou and thus without equal legal standing. This, along with the policy saying that the largest cities will remain "strictly controlled," implies that the core of the urbanization plan is to corral rural people into small towns.

Some Chinese commenters, such as Renmin University professor Wen Tiejun, have argued that promoting these small towns will actually lead to a decrease in the population of the large cities. The plan's overall strategy appears to be premised on the idea that China can reap the benefits associated with urbanization, such as rising middle classes, by driving more rural people to small cities and towns that lack both the employment opportunities and the quality social services of the metropolises that might actually attract migrants.
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It is in fact unusual for a country to explicitly promote urbanization as a growth strategy. The correlation between economic growth and urbanization is primarily a result of growth causing urbanization, not the other way around. Li's observation that urban people on average make and consume more than rural people does not imply that picking up a farmer and placing her in the city will magically triple her earning power.

Instead, the argument for growth based on urbanization is reminiscent of Mao's disastrous Great Leap Forward, a policy apparently based on the observation that rich countries produced a lot of steel. For China to grow rich, the thinking went, it should put all its efforts into steel production. During the Great Leap, China did indeed increase its steel production, but at the cost of the most severe man-made famine in human history. In the 21st century, we have the experience to know that this kind of central planning simply doesn't work.

Perhaps surprisingly, it is new rural policies, such as strengthened rural property rights, rather than the proposed changes to urban policy, which are most likely to improve migrants' welfare. People familiar with China's migrant workers have long known that many migrants do not want to change their hukou to the city, either because they plan on returning to live permanently in their hometown or just because their rural hukou has benefits they don't want to give up. Many migrants don't register even for temporary residence in the city because they worry that registering outside of their village could threaten their rights where they are permanently registered.

Stronger rural property rights could change that, and in a sign of hope for China's rural people and migrants - taken together a majority of China's population - China's government has sent a series of signals that rural rights need increased protection. The new administration's most important new policy document, the communiqué of the Third Plenum released in November, explicitly called for a strengthening of farmers' property rights.

The leadership, including Xi himself, has been drawing attention to land reforms pioneered in Anhui province as a blueprint for future reforms. Anhui was the site of the return to household farming and the vanguard of China's market-oriented reforms in the late 1970s. Recently the province has been experimenting with increased rights to renting and transferring land.

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When China passed its contentious property rights law in 2007, leftists protested that private property violated China's socialist constitution, and the law's exclusive use of terms such as "land use rights" makes clear that individual property rights remained a bridge too far. Yet in recent months, several documents, including the new urbanization plan, use terms like "property rights" and "transfer rights," and signal that greater protection of rural land rights may be in China's future. Last week, Xinhua reported that local governments would phase out the current land requisitioning system and farmers will eventually get market prices for their land.
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Strong rural land rights would enable migrants to leave their land without worrying about the local government taking it, and would potentially allow migrants to benefit from their land by renting or selling it. Presently, such arrangements lack full legal protection because of the ambiguity surrounding rural land rights.

Time will tell if the Chinese state is serious about these reforms. Even with the new language of promoting rural land rights, local governments may be too addicted to land expropriation, which is often their primary revenue source, for rural people to ever trust central government decrees absent an independent judiciary or some other mechanism for protecting their rights. Proposals for property taxes that would give local governments a stake in protecting property rights and help mitigate the current bias for commercial real estate development have so far only touched on urban property. Still, the use of the "property rights" language in the rural context could represent an important step forward for a country which typically has trouble affirming the value of such rights.

Last year, Reuters reported that an earlier urbanization plan was scrapped by the top leadership because they worried it would signal new rounds of investment-based economic stimulus. The new rhetoric is that the government is promoting "people-centered urbanization," in contrast to earlier stimulus projects. Yet true people-centered urbanization would protect the rights of the poor and empower them to make their own decisions about how and where they can best make a living.

As long as the Chinese government insists on "strictly controlling" access to its biggest cities, rural rights protections, along with the ultimate delinking of rights from the hukou, are the best hope for improving the welfare of China's poor.
Advertisement Adam Tyner is a Ph.D. candidate in political science at UC San Diego. Follow him on Twitter @redandexpert

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Advertisement With the release of the " National New-type Urbanization Plan" by China's State Council in March, it appears that China's leadership is betting that urbanization can be a main driver of the country's economic growth, as the government attempts to shift away from an investment-based economy.

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How industrialisation is linked to standard of living

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How industrialisation is linked to standard of living

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Presentation with transcript (skip the first 5 minutes)

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Nov. 2, 2015 | St. Louis
Yi Wen
Presentation (pdf)

In just 35 years, China transformed itself from an impoverished agrarian economy into an industrial powerhouse that produces nearly half of the world's industrial goods. How did it accomplish this in such a short time? St. Louis Fed economist Yi Wen, a native of China, discussed the country's recent transformation, as well as what it will take for China to continue its hyper growth and for it to eventually become a high-income nation. He also addressed how the U.S. can benefit from China's rise and whether poor nations can emulate its success.

Following his presentation, Wen was joined by fellow St. Louis Fed economists William R. Emmons and Subhayu Bandyopadhyay for a panel discussion and Q&A with the audience. Julie Stackhouse, senior vice president of the St. Louis Fed's Banking Supervision and Regulation division, moderated the discussion.

Transcript:

The transcript includes time markers for your reference.

Julie Stackhouse: Good evening, everyone. Welcome to the Federal Reserve Bank of St. Louis. So it is 6:30. We're right on time. We try to be very good about that and hopefully we'll be right on time at 8, which means we may end up cutting off some questions. I hope that doesn't happen. I hope each of you has a chance to ask questions that are on your mind. But let me first introduce myself. I am Julie Stackhouse. Here at the Federal Reserve Bank of St. Louis I'm a senior vice president. I run the banking supervision, the discount window, and some other stuff. I'll just kind of go on that for another day I guess but it's a great job. It's been a real privilege to be here at the Federal Reserve Bank of St. Louis for 13 years.

00:00:42

In fact, just this last couple weeks I've started reading Ben Bernanke's books. And I don't know if any of you have had a chance to do that, but let me tell you, he's like most, it's like accurate. It's one of the first financial crisis books I've read where I go "Uh huh, yep. That's really the way it happened." But one of the things that I've really enjoyed reading about his book is the fact that he still characterized the Federal Reserve as being this obviously fairly introverted-we tend to be fairly introverted-very nonpolitical organization. And in fact, that's our strength and maybe that's our weakness. We're not very well known to many of you, so we really are delighted when we are able to offer a program and you choose to join us, learn a little bit about the topics that are facing the financial system and that our economists are studying, but also have a chance to get to know us. So it's great. And again welcome.

00:01:33

Tonight we will have a presentation by one of our economists here at the Federal Reserve who we'll introduce in just a minute. But just a little bit of housekeeping. First of all, you do have microphones. After we finish the presentation we'll convene a panel and the panel will offer some perspectives on tonight's presentation, but we'll also leave lots of time for you to ask questions. When you do ask a question please remember to turn the microphone on. There's a little button in front of it. And that way we can obviously hear you so that'd be great. And we are webcasting the session so we want to be sure our listening audience is able to hear you as well. If you do need to leave the room tonight please just go up through the back and out the door. Out that end of the auditorium there are restrooms very close to that. If that is convenient for you, please feel free to do so whenever you need. With that we're going to start tonight with a few polling questions. Those that are returning have done this before but we've thrown in a wrinkle for you. When we get to one of our polling questions we are not going to have just numbers one through nine. We're going to have numbers one through 10. Now the reason that's a wrinkle is that when you look at this little gadget you say yes, but I don't see a 10. That's when you look really, really closely at the zero. Guess what? There is a 10.

00:02:51

And here's the deal. When we get to that "one," if you hit "one" you're getting "one" and there's no going back. So if you want No. 10 please be sure to hit the 10. But let's move on to our first question. All right, this is the one we love to ask. Is this your first time inside the Federal Reserve Bank of St. Louis? If you've been with us before for any reason you can select "one." If this is truly your inaugural visit please select "two." Oh, yeah, right. That's what I said, wasn't it? "One" is yes and "two" is no, thank you. You know that tells me right away we have a very attentive audience tonight. OK, are we all set? Let's take a look at the number up at the top. OK. So 18 percent are here for the first time. Welcome. We're glad you're here. And 82 percent have been with us before. So welcome back to that group. All right, this is the hard question that has the No. 10. "I'm employed in the following industry." And just pick the one that's closest. We know it's probably not going to be exactly right for everyone. And this is not a trick question, so OK, let's see how we're doing up in the screen. It's still going up a little bit. OK. We'll go ahead and take a look. Now that's pretty interesting. So No. 2: financial services. Does that surprise anyone? No. I got to understand this China stuff, right? And No. 9: retired. I love it. Welcome. We have this loyal following and lots in between, so that's great. We really do enjoy having the wide representation of our community here tonight. OK.

00:05:05

So with that it's my pleasure to introduce our speaker tonight. Yi Wen is an economist and assistant vice president in the Research division here at the Federal Reserve Bank of St. Louis. And of course he is a native of China, and he has really an interesting background. I don't know if he'll get into it in his presentation tonight but I did have a chance to talk with him before the session about some of his domestic travels and it is pretty interesting. But his research is in the field of macroeconomics with a primary focus on the business cycle and the Chinese economy. After finding many explanations on views on China's lack of economic foundation and that the current textbook economic theories often didn't explain what was going on in his country, he decided it was time to focus his research into China's economy. He is working on a book that resulted from his research. You'll see that published in the not-too-distant future, we hope. And among his other publications his work has appeared in Economic Theory, European Economic Review, the Review of Economic Dynamics, and the China Economic Review. And he has many credentials in addition to that. So will you please join me in welcoming Yi Wen.

Yi Wen: Well, good evening. Thank you very much for giving me this opportunity to talk about China. But before I start, as you can see or as you heard from Julie, I'm not Irish, so I do need to apologize for my limited English. And so I talk about the rise of China, which in my view is one of the most significant economic and geopolitical phenomena in the 21st century and perhaps also one of the most important events in human history perhaps since the Industrial Revolution. Why is that? Because China is huge and so far, despite more than 200 years after U.K. first started the Industrial Revolution, and we still have had only 10 percent of the world population, which is more than 7 billion, achieved industrialization. And if China could succeed in finishing industrialization, that's an additional 20 percent of the world population. So that's big issue. OK. So that's very important.

00:08:23

But because China rises so fast the entire world is unprepared, including the Chinese themselves. And so there are a lot of conflicting views floating around, talking about China's rise. Why is that happening? How to explain that. And so tonight I'm going to share with you my perspective on these issues. OK, there are so many views floating around it's like the Indian story said there's like six blind men and an elephant. So every person can only scratch a limited area of the elephant and claim that they have the complete picture. OK. So it's hard to come up with a perspective which cannot only explain China but also other nations' failure and successes and also to predict China's future.

So far there have been at least two-there are many views but I'm going to point out two-conflicting or polar views about China's rise. OK, and the first one sees China's rise as a gigantic government-engineered bubble and at the cost of its own people and the environment. So China's growth or hypergrowth is not sustainable and it will collapse because China has no democracy, no freedom of speech, no human rights, no protection of intellectual property, and low ability to innovate except copying and stealing Western technologies. And no, a host of many things which the West has possessed for centuries. And those elements have been essential for the Western civilization and the technological dominance. OK. So therefore there's no way this China rise phenomena can continue.

00:10:35

And on the other side, on the other polar, there's the other view which essentially sees China's rise simply as a natural or destined return to its historical position. We all know that China had been one of the richest nations in the world and one of the greatest civilizations. And therefore it's only a matter of time for China to reclaim its historical glory. China has had many great inventions in the ancient time, we all know. For example, the gun powder, the compass, the paper-making technology and printing technology, all of that were essential for the rise of the West and for Western civilization, OK? So therefore in that view, China will rise for sure. It's just a matter of time. And whenever China wakes up China will become strong, like what Napoleon once said.

But in neither view, neither of these views had strong economic analysis to back up their argument. In my view, they're either prejudice or simple extrapolations of human history. How could a nation with so many bad or adverse elements able to achieve a great ancient civilization in the past and to have several consecutive decades of hypergrowth to completely or almost completely transform from a vast impoverished agriculture land into a formidable industrial powerhouse? How could that be possible, OK, for China, have all those bad elements? On the other hand if culture and ancient civilization is the explanation, how come we do not yet see countries like Egypt, Ottoman Empire, and even Greece bursting into the world stage, at least not yet? So therefore we need a different perspective in order to have us to understand China, and that's the perspective I would like to share with you tonight. I hope that that perspective cannot only shed light on the mechanism behind China's rapid growth but also on the failures and the successes of many nations at their attempt at industrialization and so perhaps including the Industrial Revolution itself.

00:13:23

Again, before I start there's a standard disclaimer and I hope you take that into heart. And I'm going to divide my tonight's talk into four bullet points. First of all, I want to provide some basic facts about China's rise. Secondly, I want to provide some explanation and that's the most important part of tonight's talk. And after that I'm going to talk about what's next, OK? Then I'm going to talk about how can the U.S. respond and benefit from China's rise. Then we're going to go to Q and A, OK? So the second part is the most important part. Without that, any prediction about China or talk about the U.S.-China relationship will not be very well founded. But still giving my short limited time I will only touch upon several key issues which I detailed in my forthcoming book titled, The Making of an Economic Superpower. The subtitle is Unlocking China's Secret of Rapid Industrialization. A working paper version is available on my website. I do not mean to advertise this book, just to tell you that all the royalties from the sales of this book will go directly to Federal Reserve Bank of St. Louis Research department, not my pocket, OK? Yeah.

00:14:43

So first some basic facts about China's rise. Well, 35 years ago, China was very, very poor. OK. That's the time when President Nixon visited China, OK, and the per capita income was about one-third of sub-Sahara Africa. Africa we think is the poorest region of the world but China was even poorer than that. But only 35 years later, one generation's time, China has already become the largest manufacturing superpower, OK, or powerhouse. OK, and China supplies almost nearly half of global industrial goods including crude steel, which is about 800 percent of U.S. level and 50 percent of global capacity; and cement, which is about 60 percent of world production capacity; and vehicles, which is about a quarter of global supply; and also China has industrial patent applications which is about 150 percent of U.S. level. And China's also the world's largest producer of ships, high-speed trains, robots, tunnels, bridges, highways, chemical fibers, machine tools, computers, cell phones and many other stuff. So China currently is very much like 19th century U.S. OK, I want you to keep that perspective and that's the perspective I want to get to later.

If you look at, this is a figure about the value-added manufacturing output produced by the top five industrial powers. The blue line's the U.S. The yellow line's Japan. The green line's Germany. The brown line's Italy. And China's red. So as you can see, in the '70s China was essentially producing very tiny amount of industrial manufacturing goods and U.S. was several hundredfold of China. But starting around 1980, OK, China start to take off. And gradually accelerate and surpass all the industrial powers one by one and ultimately overtake U.S. in around 2010. OK. And if you look at a trend maybe China is going to collapse, but you could look at a trend maybe somewhere China is potentially able to produce manufacturing goods twice as large as U.S. or even more. OK, so if that is the bubble, every nation want to have that bubble and every nation should have that bubble. So therefore by looking at this picture, it's unlikely that China's rise is purely a bubble.

00:18:16

Now the economist Steven Cheung-perhaps you don't know him. He used to be a professor at Washington State University and spent many years at Chicago and colleague of many Nobel Prize winner in Chicago. And he's one of the important institutional economic theorists and a self-claimed Chicago School economist, OK? And he once wrote, he said that, "I can easily write a thick book in a week to criticize China." OK, China has so many problems so you just write a book. "However, the fact that China's miracle growth has been lasting for so long despite so many hostile social and political conditions is truly amazing and unprecedented. So China must have done something so profoundly right. But what is it?" Nobody knows. OK, that's the challenge.

Well, tonight I will try to provide an answer, one of the answers to that question. So of course, the longer answer can be found in my book but the shorter answer is that China, for some reason, has rediscovered the secret recipe of the original Industrial Revolution which took place in Britain more than 200 years ago. And any nation who has discovered that recipe, they can become industrialized. The French did it. Germany did it. The U.S. did it. Japan did it. OK, now since China also has found it, but what is it? So that's a one million dollar question. I will try to provide some answer, OK, hopefully. And of course another question is, if there exists a recipe lying there for 200 years how come China did not find it before, because China in the 17th, 18th century, China was even more advanced perhaps than Europe?

00:20:33

How come China did not start the Industrial Revolution? It was the U.K. and actually if historians' constant debate about this ... could have been India; could have been China. Remember China invented those wonderful technologies. And another question that allowed me to follow from this is that despite several decades of hypergrowth China today even though its GDP may be able to match with the U.S. in GDP terms, but its per capita income is still real low. China's still poor. Per capita income is about one-seventh of U.S. level. It's lower than country like Mexico, Turkey, or even Colombia. So therefore, next question is whether China can finish its course if China has discovered the so-called recipe. And if so, when? And what are the challenges ahead? So I'm going embed those questions into my earlier outline of the talk in this explanation part, OK, then later on talk about how can U.S. respond and benefit from China's rise.

So let's go to question No. 1: What is the secret recipe? Well, before I provide that answer, I want you to wait. Because we have to know Industrial Revolution is the single most important thing happening in human history. It changed everything. OK, in order to visualize that power here's a graph I took from economic historian Gregory Clark's book, OK, where he measured worldwide average income starting from 1000 B.C. OK, where he got the data I don't know. But most people accept that. OK. And the vertical axis essentially is the income per capita world average, OK. And he normalized 1000 B.C. as the value 1. And you can see through a thousand years entire world has been living essentially under poverty. Income fluctuate but it has not really changed much, OK.

00:22:42

You have under some empires, some monarchies, income is higher; sometimes it's lower, OK. It has not changed until the point 1800 and something mystically took place. OK, that's the Industrial Revolution. And since then the entire world diverged. That's called the Great Divergence by historians. And the average world income level shoot up very fast and now it's twelvefold higher than before, OK. And since that, there's no way that it will turn back. And the rest part of the world, as I said earlier, perhaps more than 90 percent population are still unindustrialized, therefore perhaps they still in poverty. So therefore ever since Great Britain has discovered this secret recipe of Industrial Revolution every nation try to emulate it, first in Europe and then in U.S. and also in Asia. But most nations have failed.

For example, I list here North and Western Europe successfully emulate the British Industrial Revolution in that about 140 years span of time. And the United States also successfully emulated Industrial Revolution in that about 120 years span of time. Then Japan also. It's the first Asian nation to successfully emulate it, to emulate the British Industrial Revolution for about 100 years. Now later you also have Asian Tigers starting much later, after World War II and but also took them less time to catch up. But again, not all the Asian Tigers have reached the level of U.S. income, not yet. For example, in Taiwan it's maybe half of the U.S. income level. And Singapore is roughly the same or even higher. And overall for them together they account for less than 10 percent of world population. So most of the nations have failed. It's not that they didn't try. They tried many times but they failed, OK. The question is why.

00:24:57

Economists have not come up with answers, though actually many theories floating around. One of the most popular one is called the institutional theory, OK, and it provide a broad picture or answer or theory to explain why nations fail and why nations succeed. So according to this theory, the answer, or the key, lies in political institutions. For example, if nations have inclusive institutions such as democracy then that would imply restrictions on the elite class. That would imply free market, free trade, free choice, private property rights, the rule of law, which in turn imply incentives for people to accumulate wealth, to innovate, and to grow; therefore you have prosperity, OK?

On the other hand, nations that adopt extractive institutions such as dictatorship, they would have no freedom of choice, no private property rights, no rule of law that in turn would imply no incentives for people to work hard, to accumulate capital, to innovate. That in turn would imply poverty. OK so that's the answer given by institutional theory. And one of the important institutional theorists actually lives in St. Louis. His name is Douglass North and at Washington University he received Nobel Prize for his contribution to the understanding of economic history and to institutional theory. OK. So the solution to end global poverty in all the remaining 90 percent of population is simple: democracy. Indeed, after post World War II, the United States has been leading the way to spread democracy across the globe. And one of the ideas is to end poverty, OK, because poverty not only hurts people but also generates lots of other side effects.

00:27:06

The question is, is it really the case? So I'm going to show you that this theory actually is difficult to square the facts. We can provide many, many counter-factual country examples to defy that theory or to show that that's inconsistent. For example, there are so many of these poor nations that have adopted democracy and liberal economic reforms yet they're still living in poverty, living in stagnation and with constant political turmoil. Those countries include Afghanistan, Egypt, Iraq, Libya, Pakistan, Thailand, Tunisia, Ukraine, and many others, OK. Or maybe time is not long enough. We should wait, right? It took the U.K. 200 years to finish Industrial Revolution. Those countries have had a democracy only maybe, I don't know, one decade, two decade or few years. Maybe time is not long enough. But those are not the only examples that are inconsistent with the theory. For example, we also have had many nations who lived through so-called extractive institutions, yet it is precisely during that period those nations grow the fastest and industrialize the fastest. For example Germany from 1850 to World War II, most of that period was under extractive institutions. And Germany was one of the industrial powers, OK. And Soviet Russia also between 1860 and World War II industrialized very fast. Most of that period was under extractive institutions, OK.

00:28:52

Also we have many other examples. For example, new Russia starting the 1990s after the collapse of the Soviet Union block, right? Want to transform from a socialist economy to a capitalist economy and want to continue economic growth. And they collapsed right after adopting the advice that's given by the West or by the economists. You know, "Adopt democracy and then liberalize your financial market. Privatize all your state-owned factories;" but they collapsed. And also Japan's rapid industrialization during the immediate restoration was mostly under extractive institutions, was not under true democracy. And also South Korea's economic takeoff, the most important period was during the '60s and '80s under dictatorship. We all know that. And Singapore's post-independence economic miracle. We know President Lee Kuan Yew who passed away I think last year, two years ago and had been called a dictator and essential Singapore's like a one-party and all the political party was ruled by his own family and now achieved modernization.

And also some nations even under identical institutions, you know, the same nation, with the same political institution but we still have cities with different pockets, you know, pockets with extreme poverty, pockets with extreme wealth, such as St. Louis and Chicago; and pockets with violence and pockets with obedience to rule of law, OK. For example, also in Italy under the same roof of political institutions south Italy is significantly poorer than north Italy. So therefore this institutional theory, although it sounds very, very appealing but it has lot of problems to square the facts. So we need something new, only to add something, only something different.

00:31:00

Also in the case of China, China's past more than three decades of rapid growth was under an authoritarian political system, OK? And if democracy is the precondition for Industrial Revolution, how come China is experiencing rapid growth? Or you may say China is not really going through Industrial Revolution. We'll see. And also what is going on in China today actually is not China's first attempt at industrialization. China has already had three attempts in the past but all failed, or more or less failed, OK? The first one started in the 1860s when China was defeated by Britain after the second Opium War. If you know a little of history you know that. OK, then the Qing dynasty monarchy finally decided to reform. Whoops, well, so backward, this tiny barbaric, you know, European people who used to live in caves when we already civilized. Now they are stronger than us so they can attack us. So they decide to reform and to industrialize. And half century later it was a gigantic failure, OK, didn't go anywhere. Because of that failure, there was a revolution. People say the monarchy institution was not good for China. And that's the reason China could not industrialize. We wanted democracy. We wanted what the U.S. has. So in 1911 there was a Xinhai Revolution which overthrew the monarchy fully adopted by mimicking the U.S. institution. OK, parliamentary system while, yes, European style, but democracy and inclusive institutions, even Communist Party was allowed to play a role in the government. So the Communist leader Chairman Mao, actually he was a high official during the Republic era of China because the institution was very inclusive, open to all the competing parties. And yet 40 years later, China failed to industrialize. That's why Japan was so easy to invade China and completely overwhelm China's military force.

00:33:30

And because China remained in poverty after almost 100 years of two attempts, failed attempts, at industrialization, the Communism took power, said, "It's my turn. You have all done things wrong. Capitalism is not the way to go because capitalism generated all the poverty in China, inequality. A few people or the elite class get rich. But the majority people still live in poverty." So the Communists say that's not the way to go. We have to do something else in order to industrialize China. So Communism took power around 1949. But again 30 years later China still remained very poor. So that's the year of 1978, after the death of Mao, and Deng Xiaoping took power. So why did China fail in previous three attempts at industrialization? Well, is it the lack of free market? During Communism yes, there was no free market. But not true during the late Qing dynasty and during the Republic of China. Private property rights during the Qing dynasty was even better than it was in Europe, OK. Historians have consent on that. And during the Republic of China was full-fledged private-property rights, OK. And so it's not the lack of free market per se or private property rights. But it was the lack of democracy under Communism, yes, but not during the era of the Republic of China. And it's also not lack of natural resources. Even though China is very poor in terms of natural endowment, but that's not the reason. There are many nations successfully industrialized without very much natural resources, such as Singapore, Hong Kong, Taiwan, and Japan, OK. So, but on the other hand, many other nations are very rich in natural resources. They could not industrialize, such as Middle East countries or even Latin American countries. OK, so natural resources seems not to be the necessary condition.

00:35:45

So what has China done differently this time, the fourth attempt at industrialization? Well, before I give you a synthesized theory, let me just describe some basic facts. OK, based on that we can throw some theory. First of all, the first attempt China did it in a very humble, gradualist, experimental approach, because China or the Chinese leader thought we could no longer afford not to succeed this time. OK, we have to succeed and we have failed three times before. So they want to approach gradually and they wisely refused all the lectures and theories from the West, unlike Russia. Russia accepted a bunch of MIT, Harvard economists, you know, the hyper economists, and to guide them, to tell them how to reform. And Russia collapsed. And China said "No, don't come here. OK, we'll manipulate it our own way." So first important feature for that, for China's fourth attempt, is to maintain political stability. I'm not going to judge whether that's morally right or wrong. I'm just describing the fact, OK? So maintain political stability at all costs. I have to emphasize that, all costs. OK, if any nation want to come to China to do regime change, no way, OK. So that's essentially at all cost. And so no more revolutions. So they said, "It's enough. We have had enough revolutions so now they lost two industrializations. So this time we're going to take the existing political institutions as given. We want to maintain political stability."

And also this time what they have done differently is to focus on the grassroots. They took a bottom-up reform starting in agriculture where the majority of the population lives. OK, when China started reform in 1978, 80 percent of the populations was peasants, poor peasants.

00:37:58

They are not even called farmers. They're peasants. And Qing dynasty's China's government and Republic China's government did not pay attention to the grassroots, did not pay attention to the peasants. They ignore them. And they started industrial revolution, industrialization, in the cities. Of course you have several or few merchants get very rich. But the majority of the nation remained in poverty. So this time they focus on the grassroots, they took a bottom-up approach starting in agriculture, not in the financial sector unlike what Russia has done. Start to set up a stock market and a lot of financial securities floating around and sell the equities, all the state-owned factories. But turns out that's a wrong approach, OK. You'll start building by starting from the roof rather than from the foundation. And also promote rural industries despite their primitive technologies. They need to start with more than industries. Invite Boeing or Ford company come to Beijing to set up factories. Those things may be done but they're not the focus.

00:39:22

The focus is in the rural area starting with rural factories, even though they are tiny, two, three, four, 10, 20 people. And it was very primitive technology. Technology is so primitive they were like 18th century England, OK. And use manufactured goods instead of only natural resources to exchange for machineries. And enormous amount of government support in infrastructure buildup. And also because when China started reform - 1978 - Communism has already spent 30 years to build up those heavy industries. Russia, what Russia did is to privatize all of them overnight. But China did not because they were still, even though they were highly inefficient, they were still the backbones of the economy. They took a dual-track approach, gradually privatizing and the market forced to grow to overtake them. Even today China still remains 20 percent of manufacturing produced by state-owned factories, OK. Before it was 100 percent. OK, they took a very gradual approach and they move up the industrial ladder from light to heavy industries, gradually from labor- to capital-intensive production, gradually from manufacturing to financial capitalism.

China's only started to do financial capitalism today even after three decades or more than three decades of rapid growth. And they encounter problem. You know last month there's talk the market start to tumble. So they're still learning, OK, how to do financial capitalism. But China has been able to grow so rapidly for three decades without, essentially without a stock market. So what's essential, so essential about stock market? Well, maybe essential for the future, not essential for the past. But at least so far they have not really had a well-functioning stock market. OK, think about that. Is that something unusual or something with some truth in that?

00:41:30

Whereas when the IMF and the World Bank go to develop relations, try to lecture them how to develop, the first thing they tell them to do is set up a stock market. That may not be necessary. And a stock market invites foreign speculators. They're the ones driven by capitalist spirit, you know, self-interest guided. And also they move gradually from a high-saving state to a consumeristic welfare state. OK, it's not there yet but they're moving toward that direction. So now I want to start to get into more the theoretical aspect after describing what China has done. I want to claim that actually, China's fourth attempt turns out mimic almost exactly what has happened in history for all those successful industrializations in terms of going through several key states, not in every aspect. I mean U.K. was always different from China. Institutions were different, cultures were different. But there are some very important mechanisms or key steps hidden in terms economies that are very much the same. So that's where I want to generate.

So if you look at all the successful industrializations, almost all of them, they have gone through several important stages, starting from primitive agriculture. OK, first stage after the Dark Age, especially after the Renaissance, or after Columbus's global voyage, Europe starting from Italy went through several centuries of process of market creation. I call it a fermentation of the market, so like when you ferment the sourdough bread. OK, it's a gradual process. OK, I call that, historians call that proto-industrialization. And that appeared, was features the mushrooming of rural industries with the purpose of long-distance trade. OK, so the industrialization did not start from the commercial cities even though in 16th century Europe, 17th century Europe, they all have quite a lot of commercial cities like London. OK, but industrialization did not start from there. So, from the poor rural areas, but however, with the goal of long-distance trade. Then around about late 18th century some things start to dramatically change, OK. Industrial Revolution took place first in U.K. I call that first Industrial Revolution. But later on I'm going to talk about second and maybe third and fourth.

00:44:20

The fundamental feature of that first Industrial Revolution is labor-intensive mass production for mass market. Of course in the U.K. we all know it's the textile industry. And interestingly, later on all the European nations who have successfully emulated U.K. also started with textiles: France, Germany, Netherlands, even U.S. Said, well, of course at that time there was nothing else. We still do not know automobile yet. No, even Japan, when Japan started its industrial revolution the first phase also started with textile. Even today's China. OK, China in the first 20 years of rapid growth focused heavily on textiles. And by 1995, China became the world No. 1 textile producer and exporter. So again you repeat the earlier stage of development. Why's that? Of course, I have some theory to come up but let's see if I have time to go through.

But once you almost finish the first industrial revolution with mass production of labor intensive goods for mass market that generates demand for transportation. The cargoes, you know, you need to maintain constant supply of cotton, the raw import of raw materials. And to distribute throughout the entire world you need better transportation, and that provides the stimulus. OK, and I call the industrial trinity because that's energy, plus locomotive power plus infrastructure, infrastructure including transportation infrastructure and communications.

00:46:04

OK, of course as time changes the content or the form of the trinity may change from coal to oil, for example, from telegraph to telephone, for example. But the essence of that element is the same. So the U.K. experience of that industrial trinity boom. Then that also triggered the second Industrial Revolution, which features the mass production of the means of mass production. The industrial trinity essentially is a means, not a final goal of consumption, right? And with that you have second. But once you finish second industrial revolution, that means the economy closes the loop. Now you can finally be self-sustained and maintain self-sustainable growth. And that's the point that where ultimately there's so-called a food security issue get it resolved because you can finally mechanize the production of agriculture. Then human survival is no longer dependent on weather. OK, so only nations that finish industrialization that they are no longer subject to, highly to natural disasters like developing poor countries do, OK. Then after finishing second industrial revolution, nations move into a new phase, sometimes what we call postindustrial revolution or what we call welfare state, which essentially features service economy and a social safety net, democracy, human rights, end of death penalty, bunch of other issues start to emerge even though human beings have had the idea of democracy, human rights, maybe once in B.C. or during the Greek time, during the ancient China time. But those ideas are not implementable because of the lack of economic foundation.

00:47:59

So only after nations finish their industrial revolution then the foundation's there for those ideas to be implementable. OK, and that was precisely why it is only those Western nations who have industrialized have stable democracy. And the other poor nations, they adopt democracy before starting or finishing industrial revolutions, their democracies are not stable; they come and go.

So again, let me quickly go through the patterns of industrialization, for example, U.K. was the first country to start industrial revolution, and U.K. spent at least 250 years to go through their first phase of the Industrial Revolution, which I call proto-industrialization, OK? And starting from around the middle of the 18th century to 1830, U.K. kick-start first Industrial Revolution and almost finished it. Then U.K. went through this industrial trinity boom, mass amount of production of engines and coal mining and railroads. And U.K. also kick-started second Industrial Revolution around 1850 to finish that around 1920. So all that period, that U.K. was the only dominating industrial power in the world.

By 1928, long after U.K. has finished first Industrial Revolution and also finished second Industrial Revolution, U.K. adopted universal suffrage. OK, now look at U.S. Before 1820, even before United States became a unified nation, U.S. has already started, had already started proto-industrialization. OK, and during that time, lots of tiny small firms and the long-distance trade were set up in the rural areas, not in the commercial cities, not in Boston, not in Philadelphia, OK? And around 1820 to 1860, you know, around the year of the Civil War, U.S. finished first Industrial Revolution.

00:50:24

And slightly later, when there was overlap, U.S. also experienced boom in industrial trinity. Example: the so-called railroad mania, right? U.S. has had that. And around 1870 to 1940, U.S. entered second industrial revolution. Start to engage in mass production of the means of mass production. And lots of inventions start to develop. Before that, the U.K. laugh at U.S. -"You are so poor, you mimic us. You steal all the technology from me," - but once the U.S. entered second industrial revolution, then U.S. start becoming the dominating power of the world, passed U.K.

And after the U.S. finished second industrial revolution, around 1940s, that's when the U.S. started full mechanization of our culture. Around 1920, U.S. agriculture was still very backward. About 50 percent population live in rural area. But once it reached 1940 that picture start to change. Then after World War II, U.S. fully entered welfare state. And we start to see lots of social civil movements around. And civil rights movement in the '60s, universal suffrage in the U.S. come quite late compared to other European countries. So do not lecture developing country, where are they? Well, the model of democracy, the U.S., come late. OK, 1965, and Violence Against Women Act signed in law in 1994 and same-sex marriage legalized in 2015.

00:52:06

Maybe a hundred years from now they're going to say, "How come the U.S. was so uncivilized in the 2015s? They did not allow gay marriage." But now we're considered we're very liberal; we're moving forward; we're moving ahead of many nations.

OK, so civilizations, economies develop in stages. If you jump forward, skip some stages, you have disorder, it won't be stable. So look at Japan. Similar pattern, OK. Before the so-called Meiji Restoration period when finally the Japanese door was kicked open by U.S. Navy, Japan had several hundred years of political stability, and commercial prosperity was mimicking like Song dynasty China around 900 to 1100. OK, but Japan was lucky to have that period right during the Western industrialization period so they can right connect to industrialization. So from around 1870 to 1890, Japan opened up its economy to the Western trade and started full-fledged proto-industrialization. Again, Japan did not jump into setting up modern industries. From 1890 to about 1920, Japan witnessed their first industrial revolution by relying on very extensive labor intensive low value-added technology: textiles, silk. OK, sell those goods to the West in exchange for machineries. So only later on Japan started to have a boom in industrial trinity. They had the finesse and gradually learned the technology along with the help of Westerners to build their infrastructure system.

00:54:04

Then they kick-start a second industrial revolution between 1920 and '41. Did not finish. Interrupted by Second World War because Japan became so ambitious and wanted to overtake the entire world because once the economy's so developed your appetite will develop. You want more raw materials. And they want to grab all the nations. You want to become a colonizer and so they could engage into Second World War. And the war stopped from 1945, Japan continued its second industrial revolution and finished around '70 or '80s. And that's also the period Japan entered a peaceful period of welfare state building, of course with tremendous amount of U.S. help.

Now you look at China. Well, China has only had slightly more than three decades of economic growth, but China actually went through the first three phases very rapidly. OK, why China's able to finish those phases so rapidly instead of take 100 or 200 years? I'm going to come back to that issue later. So you look at China state of economic structure. Around the first 10 years after they become reformed China went through this so-called proto-industrialization stage. OK, in that stage, in that period China's village firms increased by twelvefold just within 10 years. And they continued to increase later on, doubling every three years. OK, and that's a tremendous amount of economic force. But that's very invisible by the Westerners because using very primitive technology, producing very primitive goods. And village industries' gross output increased by thirteen- or fourteenfold. And starting around the 14 percent of GDP to about half of GDP also comes from rural industries.

00:57:06

Rural industries are very primitive in China. Economists call that a village township industries. On the surface look very different. Many economists I think made a mistake by thinking China's township village industry as something unique to China. Why is that unique? Because there's a township industry, they're not really private. They're collectively owned by farmers. They inherited this property land ownership from communism. Deng Xiaoping did not privatize land when he started economic reform. Yet despite the lack of private property, which we think essential for economic growth, China economy grew very fast, OK. But actually, even if the ownership is very different from U.K. but the format is the same, is a rural industry, OK, and aiming at long-distance trade. The village peasant workers increase to a big number, which is about 100 million just after 10 years of reform. A hundred million, that's a big labor force, but they all reside in the rural area; they didn't move to the city. OK, this city urban migrate did not happen yet. That come later. Whereas Latin America tried policy to push the farmers to go to cities. But where do they stay? Where can they find a job? So that tells us something why this proto-industrialization is important, has to happen in the rural area. And the farmers' average income also increased tremendously, about twelvefold, and the China had short economy as all the other communist nations and the social planning, right? Shortage economy. So not enough food, not enough coats, and everything was put on a quota. OK, but China ended that after just first 10 years of rural industrial growth.

00:59:02

Now China entered the second phase, which is 1988 to 1990, is roughly speaking. OK, that's called the first industrial revolution and that features mass production of low value-added labor intensive goods across the entire nation, both rural and urban. And China entered, remember, WTO around the end of that period. Before China entered WTO because the negotiating was so hard most people predicted that China was going to be hurt by joining WTO because China conceded so much. The U.S. food is going to flood China. But actually after, as soon as China joined WTO it's the other way around. Chinese goods start to flood U.S. because China was very well prepared and people did not notice. Even Chinese themselves perhaps did not notice. And so China became in that period as a sign of the flagship industry, which is textile, China become No. 1. Just like U.K. did in the early 19th century, U.S. did in the middle of 19th century, Japan did in the early 20th century, China did in the late 20th century. You go through that in stages. And by that time, village firm workers reached even higher, about one-third of China's entire rural labor force. Still they did not move to the cities. Maybe you say, "Oh, government has policy not allow them to move." But they were free to move to find jobs even though they do not have the benefits by leaving cities. And most of them stayed in the rural area to do their job. So that's the second phase.

01:01:04

Then since around the end of 1990s, China entered the phase of industrial trinity boom so you to see mass build of highways and railroads and also the housing bubble start to follow, housing boom, because once you are satisfied with food, once you are satisfied with clothing, you want shelter. So the shelter boom starts to come. And China starts to engage in mass production of energy, such as coal, and intermediate goods, such as steel and cement and a bunch of other things. And it is after that period China also, China for example the infrastructure was built so fast with the tremendous amount of savings accumulated from earlier era. China did not rely on international loans unlike many, many Latin American countries. It relied on its own saving. Even today China's national saving rate is still 50 percent of GDP. What's the U.S. level? Ten percent, maybe 15. But it's fine for the U.S. developed already. But if for undeveloped countries, developing country you only have 10 percent of saving rate that's a problem.

So yes, you can see the number. China's build of highways very fast and today also China builds speed trains. And about 28 provinces out of 30 or if you include those municipal cities, and that's 34, covered by high-speed trains. And that's the largest high-speed network in the world now, exceeding Europe. So now how come China can't achieve that? So many people like Chicago School economists-some of them are my friends. I don't want to offend them. Say it's marketism, it's they're trying to fill marketism. I have told you long time ago since Adam Smith. Let the market take over. Let the invisible hand take over and you're going to achieve prosperity.

01:03:06

Yes, the one of the very important, distinct feature of Deng Xiaoping's reform is to allow market forces to play an important role but that's not all, OK, so that's why I said yes and no. Yes, for obvious reasons the market impose economic incentives to compete, and competition we know is very important, not only for human beings but also for animal species. And impose discipline on management and technology adoption. If you adopt the wrong technology you are going to fail. If you adopt the right technology you are going to succeed. So that create a Darwinian creative destruction forces to eliminate losers. During the communism and socialism era, no firm is allowed to fail. Basically the government protects every firm no matter how inefficient you are. But once they introduce market forces, if you don't do well, you fail. So that's what a market does.

But on the other hand, the answer is "no" for some overlooked reasons, which we do not emphasize enough even though they are very important, OK? First of all it is extremely costly for those independent, anarchic, uneducated peasants to cooperate for organizations. How can they trust each other? How can they up their saving together? Where are they going to make sales? Where does the raw material come from? So it's very costly for them to do that. And because it's very costly to create market in the first place. According to Adam Smith, he said the invisible hand is the key to generate prosperity, but did he assume that the market or the material exists? No. You go to poor countries, you saw people but there was no market. OK, you have group of isolated peasants put together to mass produce something where are you going to sell? You're going to carry the bag across the mountain to knock on the doors? And also where does the raw material supply come from? You have to constantly maintain the flow from raw materials into finer goods and to sell it. So you need a master distribution system in order to make mass production profitable. So it's very costly to create a market. One of the important aspects of market, of course, is infrastructure, but it's more than that. And also what is overlooked is that it's even more costly perhaps to create market regulations, market regulatory institutions, to regulate market forces, to prevent cheating and fraud.

01:05:52

You know, market forces by themselves are not necessarily productive. They can be very destructive. We just learned that from the recent financial crisis. You need government to set up regulations. They rule the game so as to allow the productive side of the market to flourish and to let the destructive part of the market to be controlled. So therefore those elements are very important.

Now the next question is how to create well-regulated big markets. Without big markets, we cannot have mass production. Without mass production, the goods will not be cheap enough for everybody to afford that we know that we cannot have prosperity. We just have poverty, OK? Well, the early European powers relied on mercantilist state of government and powerful merchants to create monopolistic global markets. Took them hundreds, hundreds of years. Of course, also through colonialism, imperialism, and slave trade, those were very important elements for those merchants to get rich. And those are the ones to help create the market. Of course, backed by government, their navy ships. And those merchants, they had the government permission to use military force to knock open any poor nation's doors to the trade. That's what Britain did to China and even by sending opium to China in exchange for teas and silk. So in the case of U.K., generations of British monarchies and merchants including, for example, the British East India Company helped create for England the world's largest, deepest, thickest textile markets, cotton supply chains. South U.S. was one of the major cotton supply for U.K. and the trading networks. That kick started the first Industrial Revolution. That's why it was U.K., not Netherlands, even though Netherlands was even more prosperous, even richer than U.K. but Netherlands failed to grasp monopolies of the global textile market, so they failed. And the U.K. managed to do that under...backed by U.K. government and the monarchies.

01:08:19

So today developing nations may no longer have the privilege and the time, several centuries of gradual market fermentation, to nurture a big, powerful cast of merchants and rely on them to create the markets. So therefore government has to pay a bigger role today than it has took before. And if you look at China's... the three phases of industrialization, even in the very beginning the proto-industrialization or the village firms, government officials create a very pivotal, important role, to have them set up firms, have them to distribute the good, to make the sales, to provide the supply of raw materials, OK, because there was no big class of merchants. During the communism there were some; they were all killed.

01:09:09

Adam Smith actually already realized this importance of the size of market. He said we all know that division of labor, which is important for productivity, is limited by the extent of the market. And so I say to this in my book that the free market is not free. It is a fundamental public good that is extremely costly to create. The ongoing industrial revolution in China has been driven not by technology adoption per se but instead by continuous market creation led by a capable government, mercantilist government. And the famous English manufacturer-I don't know, if you read history you know him-Matthew Boulton, he wrote to his business partner James Watt, who invented a steam engine, and said that, "It is not worth my while to manufacture your engine just for three counties. But it will be very well worth my while to make it for the entire world." But where does the world market come from? It was created by British monarchies and their merchants. Otherwise you have the steam engine technology. So what? You cannot make money. Actually steam engine technology has been there from a long, long time ago but the economy did not use it because it's not profitable until mass market is created.

So, therefore, now come back to the questions I posed earlier. What is the secret recipe of industrial revolution? Why did China not find it before? Now I can give you the summary. So I create a new stage theory in my book. So firstly we need to create a market. A modern industrial market takes several key stages to create. Development is a sequential process of market creation. No matter how late a nation starts its development it must repeat earlier stage to succeed. You cannot just skip it, jump forward directly from agricultural, primitive method of production to modern automobile assembly line.

01:11:30

If you do that it is not sustainable. Just like learning mathematics, human race has through thousands of years discovered the laws of mathematics but starting from numbers to arithmetic to algebra to calculus, etc. So despite we already know calculus very well from mathematician. But for today's children to learn mathematics you still have to repeat those earlier stages, exactly like the entire human race has traveled except at a rapid, more faster pace. You have to repeat it. So that's my metaphor for this new stage theory.

In contrast, most modern development economic theories try to teach developing countries or the nations they want to do that themselves, too. OK, it's not like taking lessons from other economies. They want to do it themselves; they want to leap forward. OK, they want to leap forward. And to start industrial revolution by building advanced capital-intensive industries, by setting up modern financial systems, by erecting more than political institutions because that's what U.S. has today, therefore they think if we want to grow to the level U.S. we should do that also. But that's the roof of the building, not the foundation. They missed the chance to see how the American built their foundation in the 19th century. They are born too late. But those are written in history and we have to read it.

I pose several wise theories I read. That's people's argument why should we repeat earlier backward stages. We should just jump directly forward but that's going to be a big mistake. So I said such a top-down approach violates the historical sequence of the Industrial Revolution, therefore create problems.

01:13:33

So now with the basic picture I give to you about China's rapid growth and the so-called industrial revolution secret recipe, the natural question is what's next because China has not finished yet. OK, China's still in the middle of finishing that industrial revolution. China especially is in the middle finishing second industrial revolution, has already finished proto-industrialization and first industrial revolution. It's in the middle of the second one. So this is roughly the government plan and also roughly my estimate. OK, if China stay on the course, then China is able to eliminate poverty by 2020. OK, China has already eliminated 720 million poverty and 70 million still remain. And by 2025 to 2030, China should be able to finish, or perhaps even earlier, finish its second industrial revolution. So when I look at China I do not pay attention to the stock market, those daily fluctuations. I look at the deeper economic forces. And if you look at the newspaper in China, every day they report the innovation. And there is key sectors which belong to heavy industry. Every day you have news. So you can see this underlying trend was just like 19th century U.S. and early 20th century U.S. China was moving very rapidly and so by looking at the stock market and the change rate is the fundamental mistake. That's not going to help you to understand China. You have to look at the underlying fundamental force. And China want to build up mature financial capitalism. One aspect of that is internationalization of China's currency, OK? And maybe around 2017 to 2020 China will be able to achieve that.

01:15:32

So five years from now if suddenly China's RMB currency becomes one of the major global reserve currency don't be surprised. China is moving toward that rapidly. And became one of the chief capital net exporters. China has already achieved that too. This year China already become net capital export instead of just capital importers. And China now is carry money, huge sum of money investing everywhere: in Africa, in North America, in Middle East. China has that demand, has that capacity.

China build new global transportation system because China's population is four times the U.S. So China's potential of the size of the nation you really want to reach the U.S. income level per capita is four times the U.S. They need much larger market to support that giant relation. And therefore the current global infrastructure system is not enough for China. So China want to build a larger one. Was like the U.K. in the 19th century. U.K. was building railroad everywhere. But China's not doing that through colonialism or imperialism. China's doing that based on mutually beneficial trade, and that's the major difference. And by 2050 China become full-fledged welfare state and a high-income country. That's the goal set up by the government plan and I think the probability to achieve that is high. But it doesn't necessarily mean the per capita income is exactly the U.S. level. But even if China could achieve per capita income level of South Korea or Japan, China's total GDP would be three times large as the U.S. How can you imagine that? I mean within the U.S. has been the largest economy in the world. How can you have another nation be twice or three times bigger than the U.S.? Well, that's China's potential if China can create a large enough market to support that kind of scale of production.

01:18:14

But however, it's not easy. So I want to mention about the challenges ahead for China. On the one hand, China has been growing very fast, but the same like for the European countries for the U.S. has gone through which we may have forgotten. Lots of problems emerged during industrialization. In the case of China, China contains all those centuries of problems together into one single generation. You can imagine how big that problem is. OK, those problems include, are not limited to rampant corruption and organized crime. U.S. corruption in the 19th century was very high. You can buy, pay, I don't know, couple hundred dollars, to become a congressman or to buy a congressman. And unprecedented pollution was very, very severe and China now is determined to tackle that problem because that's not only a problem in China but also is a problem of the world. But fortunately China's government is determined to tackle that and has talked to the President Xiaoping has visit U.S. talked to President Obama and the two nations want to join hands to be the leader to tackle that issue. That's important.

And rising divorce rate and suicide rate. Before most of the marriage, just like India perhaps or other developing nations, was parents arranged. You know, no divorce, very few. Today people are free to fall in love but also free to separate and divorce rate becomes very high. But once you have this high divorce rate the problem becomes, who's going to take care of the children? In the U.S. we have a well-built social so-called safety net or rule of law, regulation system to enforce the parents to take over the children.

01:20:10

Even doesn't matter how many times you get married. But developing nation when you first met those problems it takes time to form those social institutions, OK, causes lots of problems. And the widespread business fraud and scandals and the market full of lemons and low-quality goods. This was not unique to China. Look at 19th century U.S. when U.S. was catch up with U.K. Not only U.S. steal technology from the U.K., also produced a lot of fake goods. The same happened to Japan in the early 20th century. I'm not saying this is excusable. But this is natural stages for backward nation to catch up and we have market for those that mean it encourage people to pursue their self-interest. But when they pursue their self-interest the easy way to make money is to cheat so not through hard working. OK, you have to set up institutions to prevent them to cheat but that's not easy. We'll come back.

And also pervasive asset bubbles. Housing bubble is one of them. Stock market bubble is another. U.S. during the 19th century had experienced and missed 50 times a financial crisis. And once U.S. moved to the 20th century the Great Depression you still remember. So all those things could happen and China condensed that into 35 years. But yet China has not experienced a single very dramatic financial crisis yet. And so that means the government has been and is managing the economy reasonably well. The rising income inequality is a big issue in China because not everybody is able to get rich at the same pace, same rate, and it cause discrimination. And frequent industrial accident also happen. OK, and a bunch of others I will not go through. You can read. So lots of challenges ahead, but however, I am optimistic because the fundamental driving force of industrialization is what I told you earlier. There's a force in action and those problems became like growing pains, OK, growing pains.

01:22:29

Now last question: How can U.S. benefit from China's rise? That's big issue and I don't have much time to go through but let me just mention a few. First of all China's rise help to provide very cheap consumer goods to the entire world and to the U.S. OK, so that means the U.S., even the poorest cohort of the population can afford a lot of basic consumer goods and also their children can afford those goods. And also China in return is a big market for the U.S. When China's rapid industrializing you need machineries to produce this labor intensive goods so you can import machines from U.S. And now China has environment problem and the green technology that can also come from U.S. OK, so big market. Remember China's market is even bigger than Europe. Not yet, OK. We will become bigger than Europe. So U.S. trade with China for example has been increased by fiftyfold. That's a big number. And Boeing just this huge demand from China, for example, more than 6,000 airplanes will be ordered from Boeing. That's going to maintain their employment almost forever. Which nation can afford more than 6,000 airplanes in the next 10 to 20 years? China. And only China. Next maybe India. So we'll see. And also China is a great opportunity for financial investment. The U.S. now has a very well established financial system and money can flow to everywhere. And China is still in that building stage so it provides a huge market for the U.S. investment. Actually one of my colleagues here is a-I don't want to reveal his name because I don't think that conflict with his interest working at the bank but he was buy China stocks and making lots of money and he's very good at investing at that. I'm not good at that. I don't buy any stocks.

01:24:29

And also, you know, the U.S. has come through second Industrial Revolution in the late 19th century and finished it in the early 20th century. So most of the infrastructure built in U.S. is very old. When I came to the U.S. to study in the '80s, it's like this was heaven. China was so backwards, so poor. But nowadays I travel back to China as if I'm going from Third World country to First World country. So U.S. infrastructure definitely need upgrade. You know, ports, roads, bridges, rails, subways, host of other kind of infrastructures. Estimated investment needed to upgrade U.S. infrastructure by 2020 is about 3.6 trillion. That's a lot of money. So how can the U.S. finance it? By estimate we put all the resources together the gap is still about 1.6 trillion. Who can finance that? Maybe China. China has lots of savings and monies. OK, reason that China set up Asian Infrastructure Investment Bank precisely to channel money to build infrastructure in Asia and also in other parts of the world. And unfortunately, the U.S. decided not to join that, and I think that the U.S. should have joined that so U.S. can channel fund to build, to upgrade U.S. infrastructure for the 21st century.

01:26:03

Let me just mention a few more points, then I'm done. Let me read off from the slides. So ever since the 15th century, the spirit of capitalism, according to my description "has been shake hands and do business." That's the essence. Of course, in the old times backed up by navy ships. But that's the essence. Regardless of ideology, regardless of religion, regardless of culture, and regardless national boundaries, that's how capitalism, regardless all those evil elements in the past, has created modern civilization human race has ever seen. OK, so you move to any industrial nation you see civilization. OK, whereas you go to backward nations of course, people still kind, the laws of bad forces and you don't want to live there. And for at least half century after World War II the U.S., United States, has been the leading nation, pursued one of the history's most successful nation building's win-win strategy. And we do business; I win, you win. It's not a zero-sum game unlike what Russia did before. And that strategy has nurtured the rebuilding of Europe and Japan and of the development of many other poor countries and bound them together economically.

And today seems that China is carrying the U.S. banner forward. China is investing everywhere, doing business everywhere without asking about their political system, without asking about their religion, without asking about their culture. And the U.S. criticizes that, say "You don't have any standard." China say, "I don't need a standard. Doing business mutually beneficial, that's the only standard." OK, so China's pushing that strategy and that's a win-win strategy. So now, but how much each individual nation can benefit from China's rise depends entirely on that nation's own world view and development strategies. So China did not design a solid policy in response to British industrialization. So China failed three times, missed the train. So now China's rise provides a good opportunity for many poor nations to industrialize, but it's up to them how to grab this opportunity. OK, so that's the end of my talk. Thank you very much.

01:28:42

Julie Stackhouse: This is where we're going to introduce some unplanned optionality in the session tonight. We are really at the top of our hour and I know many of you have plans yet tonight. So what we're going to do is take like a 30-second stand up and stretch break and if you're saying, "It's 8:00, I really want to leave," please do. We absolutely respect your time. But if you have some questions that you want to have answered before you leave tonight we'll go just a little but longer for those of you who really want the questions. So we'll let you pick what works best for you. In the meantime I'll ask our two panelists to come up while you're taking that 30-second stretch break.

OK, stretch break is over. This is where I can see some conflicted views, which is "Uh, I probably need to maybe go back. I really don't want to miss the questions," and so we appreciate that. We want to make it that hard for you. Initially I thought maybe I'd just seek the views of our two additional panelists here tonight, both who are economic researchers here at the Federal Reserve Bank of St. Louis. But in the interest of making sure we cover your questions, let's just see if there are any questions in the audience right now. So way in the back row.

01:31:06

Man: Professor, thank you for your enlightening thoughts. Can you give us some insight as to shadow banking concept of the demographics. I mean with the one-child policy that came in 1971, we're getting very close to the cliff where those people are starting to retire at age 60, not 65. There's no safety net, and who's going to support the demographic imbalance where there are more people retiring than people working? Who's going to pay for the living of from 60 to say, 85? And help us through that concept. And then finally give us some thoughts on total debt to GNP when you include the 31 provinces. The numbers you hear are relatively high, 2.8, 2.9. When you include the provinces, total province debt where the tremendous expansion has been outside the cities going west.

Yi Wen: Well, I try to answer a little bit. I also have two colleagues. They are expert in finance. Perhaps they can also try to answer a question. OK, I group them into two. One's about banking system, finance, credit system problem. Another one's about demography. About the banking system, yeah, China indeed, in the past decade has accumulated a lot of debt, OK? It's not all bad thing, because as the economy develop you need to develop a financial system. A financial system implies credit. OK, you generate lots of credit. And actually, according to standard the developing country China still does not have enough credit or debt.

01:33:00

But on the other hand given China's stage of development, maybe the debt is way too high, OK, could be. China's total government debt corresponded to U.S. state government federal debt actually is not very high, 40 percent of GDP. Most of the debt are either private debt or local government debt. They are, in the case for local government debt, they are all secured or collateralized. OK, so in that case that's safer. And also today the Chinese government is engendering some kind of securitization of those government debt so pushed them to the market. And then the market decide, you know, the correct debt level and the price for the debt. And so also most of the Chinese debt are domestic held. It's not international held. So that's, you can compare to Japan. Even though Japan's government 200 percent compared to this, twice as high as the U.S. Also then, Europe faces slightly I will say more, less risk when it's held by domestic. But still, as I mentioned earlier China has not finished financial capitalism and it's still learning, just starting to learn how to build financial capitalism. And China's tackling that problem. And later on my colleagues can help me with more about that.

With respect to the one-child policy, is a lot of conflicting views. China, I think two days ago, just had adopted a new policy, relaxed the constraint, the restriction from one child to two children. And many international news medias was to welcome that change. Now there are several questions. No. 1, was the one-child policy necessary? Today, it seems the one-child policy is no longer binding so that means even if you relax it, no more people don't want to have a second child because of the cost of raising children is already so high.

01:35:17

And that's the stage most industrialized nations have gone through. OK, Japan, Europe. But China seems to come a little bit early because of this one-child policy. But if China did not have this policy, starting from '78 when the reforms started, China had about a one billion population at that time. If you look at U.K. and the U.S. or many other industrial nations, population growth was the fattest during the first Industrial Revolution, when people's income started to rise and, you know, they can afford having more children and also medical technology started to improve. And if you follow the U.S. population growth or the U.K. during their first Industrial Revolution, then today China's would be somewhere around two billion without one-child policy. That's precisely why the Chinese government decided to adopt that policy, thinking that China's very poor and a limited amount of arable land could not support that big population, even though China's countryside is the same as the U.S. but the arable land was only one-quarter of the U.S. and China has four times larger population. So seems that a policy somehow is necessary in that regard. But on the other hand, the side effect that has caused population to age too early.

OK, so China has to find a way to overcome that. And when you are in the process of industrialization, especially in the first, second phase, you rely on cheap labor to produce labor-intensive goods. If that labor's not there you cannot hope to finish that process. But fortunately, China has already finished that stage. China's in the state of second industrial revolution, so therefore China should be able to find a way to address that problem. That means China has to upgrade its technology faster than it normally would be.

01:37:16

OK, for example China now is the largest nation in terms of importing robots and not just producing robots. Once you can have robots to substitute for this cheap labor, that cheap labor's no longer needed, OK, so that the issue of hindering the China's growth, that issue can be resolved. But however, there's another issue, as you also hinted. You're going to have two kids supporting four very old parents. And China's life expectancy has been increasing very fast because of industrialization. China's average life expectancy has already reached the mature industrialized national level. It's about 78 years old. And how are you going to support that? That requires social safety net and requires lots of government help. But fortunately China has a very capable and a strong government which can mobilize lots of resources. And hopefully they can find a way to solve that issue even though the age issue come a little bit too early in China.

Julie Stackhouse: Let's get one more perspective. Bill, I saw you taking notes. Did you have something to add?

01:38:24

William R. Emmons: I'll do the financial and you can talk about the demographics. I'm Bill Emmons, an economist at the St. Louis Fed. Let me comment on the financial system in the shadow banking. I think compared to the United States I would characterize the Chinese system overall maybe as somewhat less efficient in allocating capital. On the other hand, it's probably more stable, that is less subject to panics and collapses compared to the U.S., not least because the core of the financial system in China is government owned. All of the major banks are state owned so they are not really subject to collapse in the same way that our financial institutions were. It's, I think, quite likely that there would be government support if there are severe problems whether it's at the local level or at the state-owned banks. There is a precedent. The large Chinese banks some years ago had the bad assets cleaned off, put into bad banks, and run off over time. And as Yi pointed out there's much less international connection. The financial system in China is not as integrated with other countries as our system was or in Europe. And maybe the final point is the macroeconomic context that China is a very, very high saving country, has very large international reserves, and so it is almost impossible to imagine that China could run into a classic emerging markets financial crisis in which a loss of confidence of foreign investors undermines their financial system because they are the banker to the world. They're the surplus country, so they're not dependent on foreign investors to the same way that a typical, you'd think of emerging markets, financial crisis. So less efficient, I think, but on the other hand much more stable probably, immune to a kind of a financial panic.

01:40:19

Julie Stackhouse: I don't think I've ever heard you say the glass is half full before. That's really a positive statement for this guy. OK, what about the one-child policy?

Subhayu Bandyopadhyay: It's great that you passed the demographic question to me because this is something that I'm very interested in. Actually today I noticed New York Times article by Amartya Sen, who's a Nobel economist, who was discussing actually, the fact that maybe the one-child policy's effect on bringing down China's population or birth rate is a little overstated. Women's education increases and opportunity of women actually led to some voluntary declines in Chinese. So in other words, at this point Sen is arguing that maybe the empowerment and enrichment of China's women has been a major factor in bringing down their birth rates. Having said that, in terms of the stats, I was looking at the stats. When you think of India and other very populous economy, just to give you a sense of the numbers, China is around like 1.35 billion. India is around 1.25 billion, so India's almost catching up, very, very, very large. I noticed that China's labor force is around 800 million. India's is around 500 million, so China clearly has a much larger labor force. But at the same time I notice that China's age distribution is very different from India's. China, one of the things that happened in China is that you have a very large-I forget the exact numbers but zero to 24-year-old population in China is much less as a present age in the population compared to India. So for example India is much younger in terms of the population distribution. Now, in terms of a number, India's median age is 27. China's median age is 37. And I was discussing I don't know exactly what American's median age is but probably America, Europe will be the 40s.

01:42:58

So you can see that something that Yi has already talked about, China is getting close to the very developed nations' median ages. Now in terms of the implication into the future is that exactly what Yi said. You know, taken in very simple terms you are a young couple. That's where I think where your two and four came from. You're a young couple, then you are supporting your, one of the spouses is supporting their parents; the other is supporting the other parents. So basically one kid supporting two parents. In terms of the macroeconomics suddenly you have the graying of the people. Replacement population would be two parents producing two children. Now have two parents producing one child. So what, halving of the labor force? If you suddenly halve the labor force, does the GNP halve? And then if the GNP halves you have less money, less resources to support the old, right? So that could be a serious issue.

On the other hand there could be arguments made that if China did not go through this kind of policy it would have been congested, there'd be too many people, overpopulation. It would not have the freedom to grow as productively as it is doing today. So one way to think about it is, first of all China's taking steps to increase the population growth rate, for instance getting rid of the one-child policy.

01:44:27

Second is that perhaps Chinese technology is going to evolve at a rate that indeed people are able to provide, you know, for two parents because one child is as productive as two children would have been without the one-child regime. So future is uncertain. There are adjustments to be made. But I see a lot of reason for optimism.

Julie Stackhouse: Yes, way over on the left hand side.

Man: Thank you. This was a delightful talk. I've got five quick questions.

Julie Stackhouse: How about one?

Man: They all kind of fit together, but one of the things we've dealt with is textile industry thrived during the religious wars [inaudible]... Two, how would America, the United States' hubris not create warring conditions? We have an expanded Security Council. We have [the] World Bank. We haven't, only Pope Francis seems to like the UN compared to the United States. Third, does debt bring down civilization? Would Article 20 say that about certain maps of civilization with our debt and Europe's debt so severe? Fourth, when are learned people going to challenge the Vatican in its concept of contraception? And five, the fear I have of China is the elitist government, if that model prevails in the world, that's frightening to free democracy. That's it.

Julie Stackhouse: OK, wow. Well, I don't know if we can go through all those questions but maybe we can just tackle a little bit the Chinese government's style. Do you have any thoughts on that, Yi?

01:46:23

Yi Wen: Yeah, I think the way China's government manages their economy is indeed on one hand kind of unfitting to today's world style. But I want to make two points, OK, on that. No. 1, is that you look at the European industrial powers since the Renaissance, since the 15th, 16th, 17th, 18th, 19th century, look at U.S. or Japan. They all more or less went through a period, as I mentioned earlier, of a strong government. Even if U.K. had the so-called Glorious Revolution, which gives the parliament the monarchy, government took all the power. But that does not mean the combined government has really the power. Very powerful British government and that's precisely why this level of state of capacity. But U.K., the first nation to start Industrial Revolution, not other nations. OK, for example, the Flanders and the Belgian, they had equally flourishing proto-industries but they failed industrialization because they did not have a strong government to guide them to create a market for them. And U.S. government has been very powerful in history, even today. So on one hand, in the U.S. we see lots of freedom, very high degree of freedom. On the other hand what we do not pay attention to is that the freedom is insured by a huge amount or high degree of government regulation. U.S. is most highly regulated nation in the world. And the government, look at our police force is semi-militarized. You go to China, police may have no gun. How can they control 1.3 billion population? And so you have in order to ensure that you have freedom you must have the capacity, what people call state capacity, to ensure you can reduce or mitigate those evil forces. And so during the development stages, you need to have a strong government. Otherwise, mafias are going to run the show. Look at what happened in Libya and in Afghanistan. OK, although many government they were originally the mafia. But having one mafia is better than having multiple mafias.

01:49:12

Julie Stackhouse: OK, let's see if we have another question that we can get in here way in the back in the middle.

Man: Thanks a lot. This is great. I really appreciate the timeline especially. I don't know if this is best for Yi or Bill, but can you maybe talk a little bit about the timing of the relaxation of capital controls that's expected, especially like when will citizens be able to invest in stuff other than A shares?

Bill Emmons: Well we have, one of my colleagues has done some work on this who could tell you exactly the timing, but I think Yi pointed out that this is a fairly carefully planned, staged liberalization. And so I think, what did you say? Within the next five years-

Yi Wen: Yeah, I think this is actually the current government goal, right? Look at government's pushing very hard RMB internationalization, pushing RMB to join the SDR by the IMF and but in order for RMB to be international currency or one of the major reserve currency you must have had a RMB convertible. Otherwise it's not possible. So government is having set of steps, of programs to push for that. And ultimately the capital control will be lifted. But before you lift the capital control to welcome the tsunami you better build a lot of irrigation system, right? Although unlike the other...like during the Asian financial crisis those poor nations did not have that system, so the tsunami come and go and you get ruined. So this is there for you want to start the economic development with financial system. That's why it's a problem. You should go step by step. I think China is moving to that direction.

01:50:54

Julie Stackhouse: We can take two more questions. Yes, back there.

Male: Yes, you mentioned that you expect the RMB to be the world reserve currency in the next two to five years. Are you expecting a decline in the U.S. dollar, and also is China currently accumulating gold to back the RMB?

Yi Wen: Well, I think two to five years, that's the pace China's setting up. OK, making RMB first of all as a major trading currency. Then they can become reserve currency. But in order for RMB to replace U.S. dollar as the major or No. 1, that's going to take long, long time. OK, when I say major one it's maybe top four. U.S., euro, RMB, and the British pound. China now has already passed, I think, Japanese yen to be the rank and force. So expect to pass British pound.

Man: So you expect a decline in the U.S. dollar.

Yi Wen: Well, it's not entirely zero-sum game although there's a zero-sum aspect to that. I mean, U.S. dollar has been dominating the world global trade for many, many years. But once China's currency gets accepted as one of the reserve countries, of course U.S. dollar's share is going to shrink but not to the degree to make U.S. dollar No. 2. I think the U.S. dollar will still be No. 1 for many, many years.

01:52:22

Bill Emmons: I think probably economic fundamentals will be the main determinant of currency values, not so much reserve currency status.

Man: You mention the gold question. Then about gold backing the RMB?

Yi Wen: You know, since I'm not an expert in finance, I do heard that China has been accumulating gold. And also China has been allocating the IMF to have some new form of global currency rather than having just some nation's individual currency as the world currency. Let's have something everybody agreed upon. But takes time for that institution to form.

Bill: Just on the gold, I think no central bank today would really seriously consider a gold-backed currency, but to the extent that gold can serve as a reserve asset, it could play a role, as could any foreign exchange, any other currency.

01:53:21

Julie Stackhouse: And if you have any more questions afterwards we'd be happy to take them. Right up here in front.

Man: I was just wondering, you know, China's had several dynasties. And does the communist government worry more about an economic downturn than other capitalist countries? And secondly, how does the average Chinese feel about the communist government?

Yi Wen: I guess I'm the one.

Julie Stackhouse: Guess that's yours.

Yi Wen: Well, actually you know whenever I travel to China I talk to people. Also I teach courses in China, talk to students. I talk to my parents. So basically for example, you talk to taxi drivers. I think they're the best cover of the population to give you their free opinions, right? And I think on one hand, the taxi drivers or what do they think other people are thinking? They do not enjoy many aspects of what the Chinese government is currently managing the economy. OK, because as I mentioned earlier, rampant corruption. But on the other hand, they also understand that China-I think if you ask them literally. Whenever you travel to China just ask the taxi drivers. They think it's too early for China to adopt democracy, because they have seen what has happened in other nations when they adopt democracy too early. So I mentioned that in my paper democracy must have the economic foundation. It does not mean once you get rich automatically have democracy. But without that foundation, democracy cannot function. So I say that unless...democracy cannot function without industrialization. And industrialization is impossible without a strong state. So that's essentially my view.

01:55:16

So of course the Chinese people, they want to see government to have more reforms so that a government gradually become more like a servant, like a social planner. And the government also is realizing that they're changing their role. That's why President Xi Jinping is changing his government: We need to transform, change our role from a social planner to become a servant, to serve the economy, serve the poor people, serve the middle class instead of being the emperor, decide...making decisions for everybody. And so basically, ordinary Chinese people on one hand dislike many local governments. They like the central government. If we have a vote I think the people have done this, international organizations done this survey. Chinese government received the highest positive rate among all the nations, even higher than U.S. in terms of people's like their central government. But a lot of local government officials, they were engaging lots of wrongdoings and that requires establishment of institution to track them down. And so that's why currently why China is trying to really build the legal system more or less like the West has to handle those issues. I don't know if I fully answered your question.

01:56:43

Julie Stackhouse: And we'll take questions after if we do. I know we're really, really late on time, so if you do have a question that wasn't answered feel free to pop on down before you leave tonight. Before we go real quick, Subhayu, we haven't heard a lot from you tonight. If there's one thing you want to leave the audience with that you think is important, what should it be?

Subhayu Bandyopadhyay: Well, when I was hearing Yi's presentation, you know, we talk a lot about American exceptionalism. And one thing that I was thinking is kind of the British exceptionalism and starting it all. And so what was it? You mentioned Japan was very stable over the centuries and so were other places. In fact, when you think about India I know India's history reasonably well. India was a very, very rich country. And then, you know, there were empires from the time of Buddha, 600 B.C. and all. And they're like, well India probably was preeminent, and I saw your graph when you were doing the early parts. India has the largest share of the world GDP. Now but it fell. The empires rose, empires declined, you know. And so what is unique about today's capitalism that we seem to think that this is going to be stable, irreversible rise? So that's one, sort of in a larger landscape, that's one thing. And in terms of the ...but I'm tempted to think it is. I mean there is something that is durable in today's, in the free market capitalism that we have today, with boundaries of course.

01:58:23

But then when I think about the British Industrial Revolution, you know, I cannot think of Elizabethan England opportunities that were... so it is not democracy. It was a monarchy at the time and I think it was a very good time for England. And I think what from your presentation seemed the rural development was very important. It happened in England under a monarchy, at least started under a monarchy. In China, however, it happened in a very different environmental milieu, one where England had already shown the way, U.S. had already shown the way. So I'm trying to get at this endogenous development of rural productivity manufacturing where maybe that would be something that could be useful for poorer nations in Africa and all to emulate.

The other thing is that, in terms of going forward, I think something that Yi probably didn't get time to expound a lot is that today's world is fundamentally different from the ancient India or ancient China I just mentioned. It's very integrated. And I think that probably also had a major role in the spread of the British Industrial Revolution. Britain was not-Japan was pretty isolated. Very stable, but very isolated. England from the 1600s, they were like English traders going to India. Actually, I remember seeing pictures of English traders from the Elizabethan times going in a very servile way to the Indian emperors. And then 150 years later, they were ruling India.

02:00:15

So it's a very, it's an evolving thing. But one thing that must have played a big role is England's ability to reach out to the entire world, so globalization. But China already has that. India today has that. And this is, I myself, an international economics person, I feel very strongly that today's possibilities can be sort of really, you know, the economic opportunities come from globalization and openness. India's a great example of that. China too. So China lets Nixon and all, you know China opens up to some degree. India in the '90s, India was pretty industrialized through very socialistic Russia-type efforts. But India really started taking off in the '90s when India liberalized in a big way and started doing a managed load of exchange rates. I remember it was my grad student days. Exchange rates in two steps went from like 18 Indian rupees to a dollar to maybe 22 next day. Next day it was like 26 or something. And that was the beginning of the turnaround, and India started running, sort of managed to get a lot of inflows. Its balance of payments improved.

So to bring it all together, I think I see a lot of optimism in terms of India, China, U.S., other nations, of course, sort of in this going forward in this global economy. But we have hard problems to solve in other spheres.

02:02:06

Julie Stackhouse: So great strategy in China. All about execution and of course that's untested at this point or being tested perhaps in the days ahead. Bill, anything on your part?

Bill Emmons: I'd say the rise of China is a good thing for the United States and for the world as a whole.

Julie Stackhouse: That leaves us with a very clear picture, doesn't it? So I have never seen this guy so optimistic. I'm going to worry a little bit about that tonight. Well, thank you all for joining us. If you did have a question you didn't get answered and want to visit with one of these individuals feel free to do so. And again, thanks for being with us tonight.

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China's Industrial Revolution: Past, Present, Future | Dialogue with the Fed | St. Louis Fed

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Nov. 2, 2015 | St. Louis Yi Wen Presentation (pdf) In just 35 years, China transformed itself from an impoverished agrarian economy into an industrial powerhouse that produces nearly half of the world's industrial goods. How did it accomplish this in such a short time? St.

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The government is preparing to throw billions into urbanization in China, but has it thought through the hardware challenges?

Perhaps the most striking way to take in China's startling urbanization is to sit in front of a computer and click through to Google's Earth Engine. A search for Shanghai on the website brings up time-lapsed images of the city from orbit. In 1984, when the series began, Shanghai was a grey smudge in the middle of verdant countryside alongside a brown streak-the Yangtze River.

Press play and that smudge spreads like an ink stain, with downtown Shanghai becoming darker and the etched lines of Pudong International Airport easily visible. By 2012, the grey patchwork has sprawled out in every direction to leave just fragments of greenery. By 2015, Shanghai will reportedly host the second-tallest building in the world, with construction of the steel titan continuing at a feverish pace in the city's financial district.

Shanghai's mushrooming growth is part of the largest urbanization story in human history. The process is transforming China, and in some ways, has only just begun. By 2030, China's cities will be home to roughly one billion people-three times the current population of the US.

When China began its reform and opening processes in the late 1970s, the country was an overwhelmingly rural one. Back then, with more than 80% living in the countryside, it was the backwaters that supplied most of China's leaders, who sprung from peasant backgrounds.

Since then China has been transformed. From the 1970s up until the end of 2011, when half of China's population lived in cities, around 500 million people have added to China's urban population in the last three years-and the process continues to happen at a terrific rate.

Beijing regards urbanization as the next step in sustaining China's economic miracle. The push from farm to city will serve as the biggest lever for the country's economic growth, helping to modernize and transform the country from an investment-driven economy to one that is consumer-driven, according to top government leaders and independent economists.

China's urbanization drive to date has wrought severe social and environmental problems though, and a new approach is needed. Industries that are key to the process, such as construction, have thus far tooled themselves to deliver quantity over quality, raising the question: Can China actually build the 'new China'?

The master plan

Answering this fundamental question in the affirmative, Beijing mapped out the next phase of that shift from countryside to city in March of this year. China's long-awaited urbanization plan running from this year through to 2020 is not lacking in ambition or superlatives. The eye-catching headline is that the government aims to raise the rate of urbanization in the world's most populated country by roughly a percentage point every year, from 52.5% at present to approximately 60% inside seven years.

The bolder portion of the plan will confer former rural residents who are currently living in cities the same benefits and rights that urban dwellers enjoy. By granting urban residency permits, which are China's internal passports and better known as hukou. This move could transform the lives of up to 160 million migrants, as it will enable them to access basic services and social welfare. In doing so, authorities anticipate the hukou urbanization rate will surge from just over 35% in 2012 to 45% in 2020-a faster increase than the previous decade. To cater to this huge influx of up to 260 million people, planning officials have envisaged 21 mega regions nationwide to harbor the urban population.

The previous phases of the urban operating model had emphasized the 'hardware' of city building-roads, railways, airports, and so on. This approach led local officials to fixate on the size of the city-as this sets the boundaries on urban versus rural population- without thoughtful consideration and planning to ensure effective land usage. Senior officials discussing urbanization in the past typically took it as carte blanche for "another round of infrastructure spending, more steel, more cement, more building, more money, and more investment", says Qinwei Wang, Chief China Economist for Capital Economics in London.

That fixation came at the expense of 'soft' infrastructure-services to assist the urbanizing population, such as schools and hospitals. That is set to change under the plan. Planning authorities this time have vowed to focus on the people populating those urban areas for the next phase, otherwise known as 'a new type of urbanization'.

"What is new urbanization? How does it differ to China's last periods of urbanization where they brought 500 million citizens from countryside to cities? I think that had been an era of focus on hardware- transport infrastructure, getting roads, buildings, bridges, and so on-correctly invested into, and now it shifts toward... how to put more livability around China's urbanization," says David Frey, Partner at KPMG's Global China Practice and country head of the consultancy's Cities Global Center of Excellence.

"China would fail in its urbanization if it simply displaced people from rural to urban," says Frey. Recognizing such, Beijing intends to build more extensive urban public transport systems-especially in large cities-and a national rail and road network to connect smaller cities and townships. It also aims to increase water and waste treatment ratios-particularly outside of large cities-while expanding broadband internet coverage, increasing the use of cleaner-burning natural gas in place of dirty coal in cities, and more district heating in the north to replace household coal-fired boilers.

A 'people-centric' urbanization in China also means theoretically greater spending on social welfare, hopefully to boost consumption of services.

Bottom-up + top-down

The plan sticks with China's model of top-down oversight that encouraged bottom-up migration. Migrants moved of their own accord, seeking a better life in cities that were in desperate need of workers as they modernized, similar to how urbanization proceeded elsewhere. There had been a huge impediment to the flow of people from the countryside into cities due to the restrictive hukou system, and until Deng Xiaoping came onto the scene, there were tight restrictions on labor mobility.

At the same time, the role of the state runs deep in urbanization, in contrast with how the process has been largely organic elsewhere. The country's rapid phase of urbanization, especially in the last 20 years, has been driven by strong government initiative at the central and local levels. "In other places, urbanization just happens," says Frey. "It's an economic phenomenon that is a result, not a plan." City governments welcomed the influx of workers, as they had decided the maintenance of economic growth in their administrations hinged on rapid urbanization-in other words, a building binge on infrastructure.

China's command over the urbanization process stands in stark comparison with the efforts of the world's second-largest emerging economy. As recently as 1987, India was more urban than China-as a quarter of the population lived in cities, compared with China's 24% according to data from the World Bank. But China's pace of urbanization overtook India's toward the end of the 1990s and raced ahead. More than half of Chinese citizens were urbanized in 2012, compared with less than a third in India. Experts with McKinsey have attributed the overtaking to Beijing's carefully shaped approach to urban transformation, while New Delhi has been less hands-on.

"If you were to check with urban planners in any economy today, they would tell you that, in fact, the best urbanization-the most optimized urbanization-actually does occur with more planning," says Frey. Planning that involves much weighing of what to mimic and what not to mimic in other nations' urbanization models. "In China, when it's foreign expertise they need the most, they're not afraid to rush up and get in," says Kent Zaitlik, Business Development Director of sustainable sourcing and solutions company BEE in Shanghai. "That's at the helm of what makes China so great, that they're able to incorporate various learnings from around the world, and then incorporate those insights and techniques into whatever strategy they want to achieve."

The top-down approach has arguably been vindicated in the relative absence of illegal slums and informal settlements in urban China, unlike other countries that have recently undergone some form of urbanization, such as India, Brazil and Mexico.

"China does not want the type of urbanization like in Latin America, where people moved to urban areas with no jobs and became unemployed and a burden to society," says Wang from Capital Economics.

Although China's urbanization has been impressive, it has impressed because of the unprecedented geographical scale on which it is occurring. Not everything has gone according to plan and evidence of China's unbalanced urbanization has manifested in other ways. "The flaws in the previous model, in which urban construction mostly relied on land sales and fiscal revenue, have emerged in recent years, and the model is unsustainable," warned Finance Vice Minister Wang Bao'an on the unveiling of the new plan in mid-March.

Spatial urbanization has happened at a much faster pace than the rate of urban population growth-which since the late 1970s has been slower than other countries-encouraged by local governments that seized rural land and sold it to developers to build residential properties, office buildings and industrial parks. Consequently increase in urban land under construction expanded quicker than urban growth, at around 90% versus 52% from 1990-2000, and 83% over 45% in the next decade, according to data from the Ministry of Housing and Rural Development (MOHURD). Between 2000 and 2010, the ratio of urbanization of land to urbanization of population was 1.85, far above the international standard of 1.12 and leading to urban sprawl and the phenomenon of ghost towns.

Building a new China

China's new style of urbanization envisages half of the new buildings put up by the year 2020 to be 'green', compared with just 2% in 2012. It also takes aim at the hot-button issue of chronic smog hanging over Chinese cities, calling for more than 60% of cities to have air quality that meets national standards (particulate matter 2.5 rating between 35 and 75 depending on the location) by 2020, whereas environmental official announced in March that only three of 74 surveyed cities that met with national standards.

The sweeping scale of that mandate evokes skepticism regarding China's technical capacity to actually carry it out.

"My main concern is with their engineering capacity, with being able to implement some of the things they want to implement," says Zaitlik from BEE. "I don't think they really have a firm grasp of some of the engineering feats that need to be taken into account to incorporate some of the green technologies they want to use."

For instance, Zaitlik pointed to heating, ventilation and air-conditioning (HVAC) design as a particular challenge. "Design of a HVAC system is what's most important" to green building development, says Zaitlik, as it determines energy efficiency, indoor air quality and comfort. The multinational firms that BEE works with typically have the skill set to design sophisticated HVAC systems, but for Chinese firms, "it's a different story because their engineering team probably does not have the capability to incorporate some of those technologies fromabroad," he says. "That is a different kind of thinking that China will almost need a crash course in. That's what's difficult."

Frey from KPMG concurs. "That's not something you just flip a switch on," he says. What Frey expects to happen is progressive and talented individuals seizing the initiative in certain cities, with their efforts eventually gaining traction and then replicated across the country over time.

He also points out that developed economies, in their own transformational programs, have also struggled with fostering green development. "No country, no area, no region really has a lock on what that path is, [but] what China has shown is that when it sets its mind to something, it's pretty good at figuring out how to execute."

But the industry is plagued with short-termism and is beholden to maximizing profits and lowering building costs-with little consideration for the building's lifecycle, the environment or the health of the occupants. "They've been building like this for years and it's all about having results, about who brings up the building [the quickest] wins," says Zaitlik.

He adds that one of the key reasons why the entire lifecycle of a building is not given proper attention in China is because developers run the show.

"Developers don't really care about the whole life of the building. They just want to get in and get out, as soon as possible. There're no rules or regulations, or incentives for them really to actually try to go forth and make sure that this building is energy efficient."

Part of the solution may lie in China's green building certification, the Green Building Design Label, also known as Three Star. Pushed out by the Ministry of Construction in 2006, it is similar but newer than its Western counterpart Leadership in Energy and Environmental Design (LEED) and consists of a set of evaluation standards for rating green building sustainability. MOHURD doles out financial subsidies under the scheme on a-per square meter basis, with up to RMB 250 available. Zaitlik says that if adhered to it could grow green constructions quickly, but clearly defining green is crucial.

"If they don't really... solidify what the meaning of green is, and also have a rigorous process in place to actually show the efficacy of what they're developing, then it will be a lot of lost money and not much to gain further down the road." Frey argues that developers will ultimately have to act out of sheer necessity, noting some developers are already awarded projects based on their ability to differentiate with a set of eco-standards.

Some of China's largest developers are already well down this path, snapping up eco-conscious expertise and knowhow as they look toward the future, according to Frey. Smaller developers are also getting involved by tapping consultancies and institutions like the China Greentech Initiative-a collaboration of greentech firms, government agencies and non-profit organizations that promote greentech solutions.

The environmental brinks

In addition to the negative environmental impact of urbanization, social problems in addition are nothing to sneer at. The majority of urban population additions have contributed little to increased spending and consumption growth. Migrants will typically save their money to compensate for the lack of access to social benefits, rendering them not much better off than when living in the countryside in some cases.

From these complications arise vexing questions: is urbanization really the answer or are there alternative options for elevating the quality of life for rural populations? Views are split.

"Most certainly," says Rena Singer from the Seattle-based Landesa Rural Development Institute, when asked if an economy can be considered 'developed'and 'rural'. "Developed refers to standard of living, not place of living," she says.

Conversely, Frey says a high rural population would indicate underlying problems with agricultural development. Wang concurs, surmising that if the countryside is working as it should, that will simply free people up to move to cities. "[China's] productivity is relatively low when you consider many people are still in rural areas," says Wang from Capital Economics. "There's still a lot of room for China to improve in the agriculture sector, which means China does not need so many people to stay in rural zones to work in the agriculture industry."

The new plan looks to address agricultural productivity through a number of measures, such as mechanization and the transfer of land user rights from small farmers to specialized farms, rural cooperatives, and agricultural firms-leading to larger farm plots that are more efficient. Wang says a common scenario in the future might be one farmer on a combined larger plot of farmland making a better living and employing workers-versus 10 farmers each farming less than half an acre of land and living in poverty-with the other nine farmers 'sufficiently' compensated.

Intensive farming has already taken shape in pig farming. The Jiahua Pig Breeding Farm in Zhejiang province can produce 100,000 animals every year. "In the future, there will be more of these kinds of big farms. It will be more modern and better managed," says Wang.

Whether 'rural' can be equated with developed or not, China's government is decidedly uninterested in the question. For China, it's cities all that way, but as Frey notes: "that can only happen if agriculture productivity is rising."

Not one drop...

China is already a water-stressed nation, a problem that expanding urbanization will presumably exacerbate.

A study by China's Ministry of Water Resources found that approximately 55% of China's 50,000 rivers that existed in the 1990s have disappeared. Furthermore, the State Forestry Administration released figures this year indicating that China had lost 340,000 square kilometers of wetlands, that's roughly the size of the Netherlands.

Unfortunately China has only just started to address its water problems, implementing progressive pricing on water in larger cities, which won't derail massive water shortages by a long shot.

The key to avoiding that, Wang says, will be smoothing out the migratory patterns. Urbanization has typically favored the wealthier provinces on the eastern seaboard and southern coast, which has in turn increased resource pressures in those parts.

"In the plan, it looks like the government has realized this problem and they want to develop the smaller second- or third-tier cities in broader areas, not only in the coastal areas but in central or west of China, so that will ease tension a little bit."

In a break with the past, the future pattern of urbanization will likely be slow and measured. "I think China will make a lot of mistakes [but] I also think it will also get a lot of things right," says Frey.

From a more grassroots perspective, there is a raft of exciting new 'smart city' technologies-the Internet of Things, smart grids and meters, and even driverless cars-that are coming to bear, lending a technological element that has largely been absent from China's urbanization story. Shanghai's iconic Bund skyline was deemed a space-age pipe dream when it was first conceived, and is now arguably the symbol of New China. So while many aspects of the new urbanization plan seem overly lofty, China may prove again that it does what it sets out to do, by any means necessary.

[box] This article has been reprinted with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge. [/box]
(Photo by Nasa Goddard Space Flight Center via Flickr)

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The Business of Urbanization in China - China Business Review

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The government is preparing to throw billions into urbanization in China, but has it thought through the hardware challenges? By Colin Shek Perhaps the most striking way to take in China's startling urbanization is to sit in front of a ...

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How is economic growth linked to building more subway lines?

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How is economic growth linked to building more subway lines?

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Beijing to build 12 new subway lines to help support growth as Chinese economy slows

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Beijing to build 12 new subway lines to help support growth as Chinese economy slows

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Rapid growth of the subway system in Beijing

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Rapid growth of the subway system in Beijing

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BEIJING -- The Beijing subway is a madhouse and a miracle, and the record-breaking system is expanding into new corners of the city. On Sunday, Beijing

and instituted a fare hike, plowing ahead with a frenzied building boom that aims to stay one step ahead of the city's exploding transportation needs.

Between 2007 and 2014, Beijing added 235 miles of new routes -- a length greater than the entire New York City subway system. Even with construction crews crews digging, burrowing and building new subway lines 24 hours a day, at rush hour passengers still have to claw and shove their way onto subway cars that appear ready to burst at the seams. And while transportation planners have spent a decade pushing through one of the greatest expansions of public transportation in history, Beijing's roads remain gridlocked, its skies smog-choked and its transportation infrastructure pushed to the limit.

The graphic below shows the astonishing expansion of the Beijing subway from 2001-2014, including new lines projected to open through 2016. Continue reading below.

Now stretching approximately 327 miles, Beijing's subway system is second in length only to Shanghai's (340 miles) and far ahead of London's (250 miles) and New York's (232 miles). The Seoul Metropolitan Subway is sometimes considered to be 611 miles long, according to a broad definition that includes lines operated by neighboring cities, but a more restrictive measurement puts the length at 203 miles.

Plans for Bejing's near future call for roughly forty miles of track to be added to the system in both 2015 and 2016, bringing total length to around 406 miles. Some forecasts predict that the city will have over 621 miles of subway operating by 2020, though plans for new lines remain tentative.

The current sprawl of the Beijing subway is even more surprising given where the system was just a few years ago: In 2001, the entire system was a mere 32 miles long, and as late as 2007, it boasted just 84 miles in track. Since then, a massive construction boom has taken place, fueled by preparations for the 2008 Olympics, as well as China's economic stimulus plan during the global financial crisis. These factors have led to a near-quadrupling of track length in just seven years, helping Beijing break records with a daily ridership over 10 million and an annual ridership over 3 billion.

With new track opening each year, the subway system is enabling Beijing's expansion, while also struggling to keep up with the city's breakneck population growth. Beijing adds roughly 500,000 new residents each year, and its current population of 21 million is approaching that of the whole continent of Australia, 23 million. The full crush of the city's population explosion hits riders hardest during rush hour: Boarding mobbed trains can be a test of brute force, and surviving a jam-packed ride requires a zen-like equanimity. Videos depicting the mayhem of Beijing's rush hour have gone viral.
This 2013 video of the rush hour struggle at Line 13's Xierqi station went viral.
Subway lines continue to form a dense web in the center of the city, with increasingly longer lines pulling surrounding farmland into the urban orbit. The expansion pushes out the borders of urban Beijing, but also leads to the destruction of property and modes of life that aren't consistent with the new economic calculus. The arrival of a new subway line often leads to skyrocketing property values, with high-rises replacing houses and new businesses clustering around subway stations.

In addition to opening a new line and extending three existing lines, on Sunday Beijing also implemented the first subway price increases since 2007. The system has long operated at huge losses due to a low flat fare of around $0.32 for all rides. By raising base fares to the equivalent of 48 cents and implementing distance-based pricing, the city hopes to thin out ridership at key times and reduce the $3.2 billion in subsidies it paid to the subway system in 2013.

The photos below document the construction and operation of Beijing's subway lines. Scroll down for year-by-year graphics of the expanding subway map.
Newly opened Zaoying station on Line 14 increases access to Chaoyang Park, the city's largest green space.
Beijing's expanding subway system, 2001-2016:

Graphic by Hilary Fung and Alissa Scheller

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Beijing's Incredible Subway Expansion In One GIF

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BEIJING -- The Beijing subway is a madhouse and a miracle, and the record-breaking system is expanding into new corners of the city. On Sunday, Beijing and instituted a fare hike, plowing ahead with a frenzied building boom that aims to stay one step ahead of the city's exploding transportation needs.

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With statistics and information about both London and China

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Growth in Beijing after the Olympics in 2008

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Growth in Beijing after the Olympics in 2008

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Between 1978 and 2004 the urban population of China grew from eighteen percent to forty-one percent of the total population, commonly said to be 1.3 billion. ¹ Given the annual increments in this massive urbanization process, it is not hard to estimate conservatively that China's urban population is now close to forty-five percent of the total number of people in the country.

By 2010, probably close to one half of the national population will be urban dwellers. That's 600-700 million urbanites of one sort or another, the most massive single urbanization in the history of the world.

The Floating Population
One of the compounding factors in getting a true figure is the phenomenon commonly referred to as the "floating population"-rural migrants who temporarily move to urban areas, most often living in ghettos filled with people who come from the same province. The proportion of returnees varies: one study says between two and fifteen percent of migrants return to their rural communities ²; another suggests the number is closer to thirty-three percent. ³

In China, there have been two classes of urban dwellers: those

who have the official city residential permit and the more
recent arrivals who do not.

Thus in Beijing, for example, one finds the so-called Zhejiang village (the name of a coastal province south of Shanghai) with its tens of thousands of densely-packed people of living in conditions of squalor and a total lack of physical and social infrastructures. Michael Dutton ⁴ describes the police action reflecting the Beijing government's desire to suppress the "floaters" or mangliu of Zhejiang village, which (along with many other such "villages") are generally considered to be a "blight" on the urban landscape of the national capital.

In China, there have been two classes of urban dwellers: those who have the official city residential permit (the notorious hukou) and the more recent arrivals who do not. These latter people are part of China's floating population. People's Daily reported in July 2005 that "China's floating population has increased from seventy million in 1993 to 140 million in 2003, exceeding ten percent of the total population and accounting for about thirty percent of rural labor force."

According to Hong Kong's Department for International Development (DFID), the hukou system in China was designed to prevent the free movement of people from rural to urban places and to protect industrial development in the cities in the planned economy. By attaching different welfare entitlements (subsidies) to urban and rural hukou, the system divided the people into two societies separated by an invisible wall.

However, as the market economy has deepened, particularly as rural migrants have become an indispensable part of the urban economy, the need for the traditional hukou system is being challenged. The recent relaxation of the hukou system began in 2001. At that point, the government fully recognized the importance of urbanization for overall development and began to develop its new strategy for its tenth 5-year-plan. The hukou system has been further relaxed and the importance of the hukou permit for migrants is now much diminished. In Shanghai and many other big cities in China, a "green card" system, in which there is no basic difference between the local residents and the green cardholders, is emerging. (Click here for full report).

It is doubtful that more than a small portion of these were even counted in China's most recent census in 2000. Migrants do not have any of the entitlements-such as subsidized food and housing (even with the growing trend to purchase private housing, interest rates are subsidized and therefore very low), schools, and healthcare-of the official residents of the city. The migrants come to the city because there is no work for them in the regions from which they come, and the jobs they do manage to get are usually comparatively low-paid and often temporary (e.g., domestic and construction workers, menial factory jobs, illegal sidewalk vending of goods or services).

About one-fifth of the entrants in the urban labor force

in China come from rural areas.

According to the DFID report, about one-fifth of the entrants in the urban labor force come from rural areas. In spite of their economic fragility, most of these workers manage to send or take a large portion of their meagre wages back to their rural families. A recent report estimated that the approximately 100 million rural residents who work away from their villages sent or carried home a total of 370 billion CNY (about thirty-five billion USD) in 2003, an increase of 8.5% from the previous year. Estimates of the amount sent/brought back by migrant workers range from between three and four thousand CNY. ⁵

Chinese-style Slums?
This is the context through which we, as Christians, must see the development of urban "slums" in China. Recently in Beijing, a deputy minister of construction admitted that many "villages" within cities had become "Chinese-style slums." They are indeed distinctive. In spite of the rapid influx of rural labor into the cities (by official estimates, an average of 8.4 million people a year between 2001 and 2005, bringing the total to around 120 million), they have not spawned huge shantytowns. Instead, scattered villages within cities are often behind walls built to hide their squalor, and old state-owned apartment buildings have filled the gap. In fact, the traditional notion of what a slum is appears difficult to find in modern China.

Instead, we have the phenomenon of migrant, disenfranchised, and underprivileged people grouped in villages in each major city.

Urban Villages
The eventual goal of Beijing's onslaught is still unclear. A government survey in 2002 found 332 villages with a total population of more than 800,000 migrants in the eight urban districts of the city proper-nearly one-third of the total migrant population of Beijing. Urban villages ⁶ are a unique phenomenon that is part of China's urbanization process.

The villages appear on both the outskirts and the downtown segments of major cities. They are surrounded by skyscrapers, transportation infrastructures, and other modern urban constructions. Urban villages are commonly inhabited by the poor and transient, and as such they are associated with squalor, overcrowding, and social problems, and are considered by some as no better than Chinese slums. However, they are also among the liveliest areas in some cities and are notable for affording economic opportunity to newcomers to the city.
Endnotes
1. National Bureau of Statistics. 2004. China Statistical Yearbook 2004. Beijing: China Statistics Press. 32.

2. Bai, Nansheng and Yupeng He. 2003. "Returning to the Countryside Versus Continuing to Work in the Cities: A Study on Rural Urban Migrants and Their Return to the Countryside of China." Social Sciences in China. Winter, 151.

3. Zhao, Yaohui. 2002. "Causes and Consequences of Return Migration: Recent Evidence from China." Journal of Comparative Economics 30: 376-394.

4. Dutton, Michael. 1998. Street Life in China. Cambridge: Cambridge University Press. 147-159.

5. Bai and He in http://www.dfid.gov.uk/countries/asia/China/urban-poverty-study-english.pdf.

6. Chinese: Ì´ü_Ì_åüå_Ì_å‰Û÷; pinyin: Chéng ZhÌÉång CÌÉåÇn; literally: "village in city"

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Between 1978 and 2004 the urban population of China grew from eighteen percent to forty-one percent of the total population, commonly said to be 1.3 billion. 1 Given the annual increments in this massive urbanization process, it is not hard to estimate conservatively that China's urban population is now close to forty-five percent of the total number of people in the country.

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How the Chinese government is attempting to control rural to urban migration

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How the Chinese government is attempting to control rural to urban migration

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Advertisement
As part of China's larger-reaching economic reforms, the government hopes to achieve a 60 percent urbanization rate by 2020. On Tuesday, President Xi Jinping expounded on the right way - and the wrong way - to go about achieving this goal during a meeting of an economic work group.

Speaking to the Central Leading Group on Financial and Economic Affairs on February 10, Xi "demanded stable urbanization," according to Xinhua. Xi's conception of urbanization involved attracting "suitable people" to live in urban areas. "Suitable people," apparently, are those who are both "capable of maintaining steady jobs and comfortable in cities."

It sounds odd to suggest that China has a problem attracting people to make the move from rural areas to the cities. That process has been underway for decades now; according to data from the World Bank, China has gone from a 30 percent urbanization rate in 1994 to 53 percent in 2014. That means nearly a quarter of China's population - roughly 300 million people - made the move from countryside to city in the past 20 years.

Enticing rural migrants to cities is not a problem for China. In fact, China has had serious difficulties figuring out how to handle the migration that is already happening. The hukou system, which links receipt of social services (from healthcare to education) to a residence permit, has made many rural migrants second-class citizens in their new urban homes. Viewed in this way, Xi's comments on attracting "suitable people" are telling. The problem lies not in the "attraction" factor of cities, but in making sure the migrants that do arrive in urban areas are "suitable."

So what China wants is not urbanization per se (that process is already underway), but a different kind of urbanization - "new-type urbanization," according to a planning document released by China's State Council in March 2014. That plan involves, in part, legitimizing the migrants that have already made their homes in China's cities. The State Council plan is supposed to help 100 million permanent urban residents obtain an urban hukou.
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Last December, the State Council's Legal Affairs Office released a draft law regarding hukou reform that will allow migrants to obtain access to social services - up to a point. Migrants must meet certain criteria to be eligible, including employment, housing, and length of stay. And these criteria will be strictest in the cities that are most attractive to migrants: mega-cities like Beijing, Shanghai, and Guangzhou. On Friday a suburb of Beijing became part of a pilot system to test the new hukou distribution system, joining similar test efforts underway in Shanghai, Guangzhou, and Tianjin.

Meanwhile, China's smaller cities would eliminate the hukou system entirely. The hope is that by reducing barriers to entry in smaller cities and towns, those locales will become more attractive to migrants. However, as Adam Tyner noted in an analysis for The Diplomatlast year, migrants have never had much of a problem getting hukou in smaller (and poorer) towns, but there's little desire to do so. These smaller cities "lack both the employment opportunities and the quality social services of the metropolises that might actually attract migrants."

China's small cities actually do have the attraction problem that Xi mentioned in his remarks. For some Chinese officials, the solution has been to simply relocate entire villages into ready-built cities, something the central government frowns upon. "'New-type urbanization' focuses on making migrants into genuine urban citizens, not just building more, bigger cities and forcing people to live there," emphasized in a recent piece.
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But if China is not going to forcibly relocated rural residents to small cities, how is it going to make this specific type of urban area more attractive? Subsidized housing? More attractive social services? Subsidies for businesses to set up shop, providing an employment draw? That is exactly the puzzle Beijing will have to solve if urbanization with Chinese characteristics is to succeed.

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Advertisement As part of China's larger-reaching economic reforms, the government hopes to achieve a 60 percent urbanization rate by 2020. On Tuesday, President Xi Jinping expounded on the right way - and the wrong way - to go about achieving this goal during a meeting of an economic work group.

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BEIJING-China's capital, suffering from growing pains following years of breakneck expansion, is embarking on a radical plan to rein in its population by kicking people out of the city's center.

Beijing's government is shutting down businesses and moving others out of the central part of the metropolis in the hope that people will follow. Entire markets deemed unfit for the capital have been closed or moved and services shut down.

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BEIJING-China's capital, suffering from growing pains following years of breakneck expansion, is embarking on a radical plan to rein in its population by kicking people out of the city's center. Beijing's government is shutting down businesses and moving others out of the central part of the metropolis in the hope that people will follow.

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BEIJING-China's new leaders are counting on urbanization to remake the economy but have tried to limit the flow to the country's largest cities, fearing that a surge in migration could turn them into Latin American-style slums.

Some urbanization specialists inside and outside China argue that the fear is largely misplaced. The problem with Beijing, Shanghai and other Chinese megacities, they say, is that they aren't even more densely packed-or better planned.

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BEIJING-China's new leaders are counting on urbanization to remake the economy but have tried to limit the flow to the country's largest cities, fearing that a surge in migration could turn them into Latin American-style slums. Some urbanization specialists inside and outside China argue that the fear is largely misplaced.

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China's extraordinary economic boom has gone hand-in-hand with urbanization. In 1950 13% of people in China lived in cities. By 2010, the urban share of the population had grown to 45%; it's projected to reach 60% by 2030. Twenty-five of the world's largest 100 cities are in China.

Urbanization, in turn, is reshaping both the physical environment and the cultural fabric. Take, for example, the issue of pollution. Huge cities place huge demands on the environment, but high-density living conditions also present opportunities for improving efficiency of energy usage.

There are clear signs of the environmental challenge. When the coal-fired plants that provide heat to the 11 million citizen of the far northeastern Chinese city of Harbin came on for the first time this fall, air quality got so bad it created a whiteout that halted traffic, closed schools and shutdown the airport. Speaking on PBS Newshour, Evan Osnos of the New Yorker said that the environmental cost of China's rapid development is felt across the country. "People are losing their patience with it," Osnos said.

At the same time, there are efforts to raise environmental standards, including more than 80 low-carbon programs going on around the country. They include developing emissions inventories for carbon dioxide and other greenhouse gases, setting measurable emissions-reduction targets, establishing carbon emission trading platforms, and creating carbon intensity standards (that is, determining acceptable levels of carbon dioxide produced per unit of economic activity). Jonathan Woetzel, a director at McKinsey, explains the driver behind this push to create a new norm: "It costs a lot less to prevent a problem than to have to fix it later," he says. "The competition now is about finding those technologies that can increase productivity, be good for the environment, and deliver a high quality of urban life to the citizenry."

Yale Insights talked with Karen C. Seto, a China expert and professor of geography and urbanization at the Yale School of Forestry and Environmental Studies. While underscoring the unprecedented scale of China's urban explosion, she encouraged a nuanced view of what urbanization means to the country. "It's not that China cities are bad for the environment-or that they're all going to save the environment." She points to Zhongshan as an example of a city working to preserve its natural capital while developing, even as other cities appear to take an "anything goes" attitude.

Seto points out that different parts of China are at very different phases of development. The earliest-developing cities-including Shanghai, Beijing, Shenzhen, and Guangzhou-have the most educated and wealthy populations, but they are now competing with newly developed urban centers for businesses. While 20 years ago the coastal cities offered the best chance of economic success, "nowadays, there are factories and enterprises set up throughout the entire country, so there's a lot more opportunity around the entire country."
TRANSCRIPT Q: What are three things that everyone should know about urbanization in China?
Karen Seto: Okay so, three things that everyone should know about urbanization in China: One is the scale is just unprecedented, and I think for anybody who wants to study China or do business in China, I would say go to China. And don't just go to Beijing and Shanghai and Guangzhou. Go also to a second-tier city, because I think for someone who is entering the China market now, you're going there today, let's say for the first time, your image of Chinese cities and China's urbanization is-if you go to Beijing and stay in Beijing-your image is one of a large scale, very modern. And you have no comparison to understand and to contextualize where these people are coming from and the big change that they're undergoing. So, I would say the scale is so unprecedented that, in order to really understand it, you need to go to a smaller city. Take a plane ride and go west; head north. You don't actually have to go very far. Even if you ride the train out of Beijing about two hours, you'll at least get a very different sense of a second-tier city. So I think that's one thing, getting a better sense of the scale.

The other thing that I think everyone needs to know about China's urbanization is that it's a process that's still in transition. There are some cities that are undergoing a third phase of transition, a third phase of development. There are other cities that are just starting their urbanization process, and so you're going to be comparing apples and oranges. There are some cities where you're going to get a very large labor pool, very diverse labor pool, very educated labor pool, very sophisticated set of consumers. There's going to be another set of cities that are primarily a regional hub for rural migrants, and there you're not going to get the Guccis and kind of the fashion-forward, high-end consumer. You're really looking at people who are really trying to significantly improve their standard of living, make the jump from an agrarian economy over to manufacturing. So, I think it's important to understand that this urbanization process is still underway and that different cities are undergoing different urbanization transitions.

I think the third thing that's critical about China's urbanization that everyone should know is that it's not a black and white thing. It's not that China cities are bad for the environment or that they're all going to save the environment. There are clearly some cities that have-Zhongshan is a good example down in the south that has really done a very, very good job in trying to preserve the environment, preserve ecosystem services. Some of the cities that have been able to develop more slowly have been able to develop in a much more rational way in terms of, again, preserving the environment. Other cities have a much more "go west" or frontier feeling, and when we think about the "go west" feeling or the frontier landscapes, those are places where almost anything goes. And so, you have some cities that are growing slowly, more methodologically, and others that are "this is a boom town" feeling. And so, I think that the verdict is still out in terms of how urbanization will affect the environment and sustainability. But I think it's critical for us to understand that it's a very complex set of interactions and it's a fast-moving train or a fast-moving plane. I go to China two to three times a year, and even in my field sites when I go back, places are constantly changing. It's a very dynamic place.
Q: How much are trends in China's rapidly growing cities setting the agenda for the country?
Seto: Urbanization is driving economic development in China. There's no doubt that what will happen in the cities will have a huge impact for economic well-being for the entire country. You probably saw that the Chinese government recently indicated that urbanization is one of their top agenda items in the next ten years, and clearly they see urbanization as the pathway to lift millions of people out of poverty. And historically, if you look at the relationship between a country's urbanization level and its GDP, there's a very strong relationship between what percentage of the population is engaged in agriculture and the country's per capita GDP. And it's very clear that what happens in Chinese cities will be really critical for how the country develops economically and in terms of environmental sustainability.
Q: What is the relationship between globalization and urbanization in China?
Seto: So, if you look at the cities that grew the fastest during the first wave of China's urbanization-so this is, again, in the '70s and '80s-those were the cities that were designated as the special economic zones by the central government. So, these were places that were laboratories for different, new types of economic policies, and those are places that developed rapidly. We had a big influx of investments from overseas investors, and those are places where we can see the expansion of factories, of housing, of roads, etc. So, you can think of those cities as having a head start over all the other cities. These special economic zones had a head start in terms of economic development. They were the ones where they had the relationships with the overseas investors, FDI. And that really set, I would say, a precedent in terms of establishing managerial expertise, relationships with foreign investors, and also really incubating a local set of local knowledge and local know-how. But now all of China, in many ways, can be thought of as a special economic zone. If you go to any major city, any provincial capital in China, you're going to see foreign nationals, you're going to see foreign companies, but they're primarily concentrated still along the coastal regions.

In the interior cities, we see a lot more of the domestic investments. There are foreign companies that are moving into the western areas. The central government had a policy about a decade ago called the Go West policy, which was to try to shift investment towards the west. We see that. We see that in the economic data. We see that in terms of the impacts on urban development. But you can imagine places like Shanghai and Beijing have a lot of connections, a lot of bilateral connections, in a way that an interior city like, let's say, Wuhan or even Chengdu may not have. But what we're seeing in those western cities is a lot of the more locally grown-a lot of the domestic companies are in those places.

One of the things that I think is a challenge for many companies operating in China now certainly is the increase in labor costs. So the cities like Shenzhen, Guangzhou-the cities that developed the fastest-those are the places where the labor costs are also the highest. Those are the places where you're going to go and see really nice housing stock, you're going to see the Prada shops, you're going to see the Gucci shops. And those are places where you're not going to find the factory workers, or very few of them. And so, we're seeing the shift of, let's say, manufacturing-based development moving more inland into the country.

It's very difficult to get workers to migrate long distances to go to the south anymore. Twenty years ago, it was the only game in town, and so workers from all around the country really migrated and flocked to these coastal regions. But nowadays, there are factories and enterprises set up throughout the entire country, so there's a lot more opportunity around the entire country and certainly in the western regions as well.
Q: How does urbanization affect where Chinese companies locate?
Seto: Well, it depends on what your business does, right? And so if your business requires really highly educated, maybe, services-high levels of technical know-how, I think that there certainly is a much larger labor pool in these established first-tier, provincial-level cities. If you're a nuts and bolts widgets kind of company and you can train everybody that you want to hire, I think you probably don't need to be in a Beijing or a Guangzhou or a Chongqing. You can probably go to a second-tier city. Labor costs will be significantly lower. And you have to remember that even though China's urbanization levels are really high, there is still a very large percentage of its population that is living in the countryside and living in much, much smaller towns. And so, setting up shop in a smaller town, you're a big fish in a small pond, as opposed to going to a place where you're competing with the Dells and Ciscos and SAPs and all the other global international companies. Not to mention the growing number of Chinese homegrown companies as well.

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What Should We Understand about Urbanization in China?

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China's extraordinary economic boom has gone hand-in-hand with urbanization. In 1950 13% of people in China lived in cities. By 2010, the urban share of the population had grown to 45%; it's projected to reach 60% by 2030. Twenty-five of the world's largest 100 cities are in China.

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Traffic in Shanghai, China. Photo by Carlos ZGZ/Flickr.

A century of car-centric urban development has left our cities polluted, congested and searching for sustainable solutions. Transport Demand Management (TDM) strategies can provide these solutions by combining public policy and private sector innovation to reverse over-reliance on private cars. The Moving Beyond Cars series-exclusive to TheCityFix and WRI Insights-offers a global tour of TDM solutions in Brazil, China, India and Mexico, providing lessons in how cities can curb car culture to make sustainable transport a reality.
As China's GDP has grown, so has the number of cars on its roads. From 2008 to 2010, the country's vehicle ownership almost doubled, from 38 vehicles to 58 per 1,000 people, and is set to hit 269 vehicles by 2030. This growth in car ownership not only means that the auto industry and infrastructure investments will continue booming, it also means more air pollution, energy consumption and traffic crashes.

Yet at the same time, some Chinese cities are starting to see the error of a car-centric world. They're pursuing transport demand management (TDM) strategies designed to reduce private vehicle travel and create safer, more livable cities.

Beijing and Shanghai are some of the earliest adopters of TDM in China. Their different results and approaches shed light on how other cities can be successful with TDM.

Beijing and Shanghai: 4 Lessons for Curbing Car Travel

In 2004, Beijing and Shanghai both had about 2 million vehicles. By 2010, Beijing's car ownership had skyrocketed to 5 million, whereas Shanghai's grew to only 3.5 million. So what happened?

Lesson 1: Proactive Policies Matter.

Shanghai was an early adopter of license auctioning, an approach pioneered in Singapore in which residents bid to receive one of a limited number of license plates. Shanghai put the policy in place in 1994, before motorization had really picked up. Beijing, on the other hand, did not implement its own vehicle quota system until 2011 as a reactive response to the 5 million vehicles already choking its streets. Shanghai shows that it's important to act quickly and calculate the right timing to implementing vehicle-ownership restrictions.

Lesson 2: Pricing Is Both Equitable and Profitable.

Shanghai's vehicle quota is allocated through auctions, which not only slows down vehicle growth, but also raises revenues for transit expansion. In contrast, Beijing adopted what it deemed a more equitable lottery system, randomly awarding licenses to applicants. This has backfired, though, as the system not only misses the opportunity to raise funds for public transit, but also spawned black markets for winning bidders to capitalize on their free licenses.

Lesson 3: Quick Fixes Are Not Enough.

Before switching to a vehicle quota policy in 2011, Beijing adopted "proof-of-parking," a policy that requires residents to obtain parking certificates before purchasing a car. Although this policy has been successful in Tokyo, the high costs of verification and the lack of enforcement meant fake certificates were easy to come by in China. The policy was eventually abandoned. Other Chinese cities have similar stories. These regulatory policies often seem easy to implement and likely to produce quick wins, but have limited effect considering the scale of China's motorization challenge.

Lesson 4: Holistic Measures Are Key

TDM cannot work in isolation. In both Beijing and Shanghai, the introduction of TDM policies came at the same time as expanded and improved transit services to provide new alternatives when driving is not an attractive option. Further, complementary measures like investing in public transit, dense and mixed use development around transit stations, and walking and cycling improvements can complement TDM and maximize its effectiveness.

Momentum Is Building

Despite pushback from the auto industry, political will is building to get driving under control. Beyond Beijing and Shanghai, Shenzhen adopted a vehicle quota system in 2014 that limits new cars sold in the city. Even more cities now restrict which vehicles can travel on certain days of the week based on license plate numbers.

And there's hope that even those cities still seeing an unflinching increase in car ownership will eventually get their car habit under control.

Beijing, for example, learned quickly, and is now embarking on a new path. The city is currently looking to expand its TDM options to include congestion pricing and has proactively engaged the public in policymaking and implementation. The city is also showing leadership by limiting vehicles purchased by government institutions in an effort to combat the cultural preference for car ownership.

Most importantly, the city has come to understand that a sustainable city is a place for people, not cars. Such lessons can pave the way for a sustainable urban future in China.

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4 Lessons from Beijing and Shanghai Show How China's Cities Can Curb Car Congestion

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A century of car-centric urban development has left our cities polluted, congested and searching for sustainable solutions. Transport Demand Management (TDM) strategies can provide these solutions by combining public policy and private sector innovation to reverse over-reliance on private cars.

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Beijing should learn from London for Olympic legacy planning

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One year after the 2012 Olympic and Paralympic Games, London hosted the World Triathlon Grand Final in City Center's Hyde Park and it was labelled as the "Olympic legacy event." It was held on much the same course as the 2012 Olympic Games and finally the men's race was won by Javier Gomez of Spain, who took the silver medal at the same place in last year's Olympic Games.

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BEIJING, March 25, 2014 - A new report recommends that China curb rapid urban sprawl by reforming land requisition, give migrants urban residency and equal access to basic public services, and reform local finances by finding stable revenues and by allowing local governments to borrow directly within strict central rules.

As China's people are increasingly concentrated in cities, with 200 million more urban dwellers than a decade ago, the government needs to strengthen the enforcement of environmental legislation and reduce the number of pollution-related health problems, according to the joint report by the World Bank and the Development Research Center of China's State Council.

The report was prepared over the last 14 months and the interim reports were shared on a continuous basis with China's top policymakers as input to the government's policy discussions on urbanization, providing an important basis for the formulation of policies on China's new model of urbanization.

"The reform agenda the report presents would boost revenue for farmers in land sales, provide more services for migrants and encourage more responsible financing by local governments. It would also mean greener urban planning, and stronger environmental management so everyone can breathe easier," said Jim Yong Kim, World Bank Group President. "China has already made big progress with experiments at the local level that can be expanded on a huge scale."

"Urbanization is a powerful engine for China's sustained and healthy economic growth," said Lou Jiwei, Chinese Minister of Finance. "It is necessary to put people at the core of urbanization, supported by institutional and systemic innovation, and unleash the development potential of urbanization through reform. We need to accelerate reform of the fiscal and tax system as well as investment and financing mechanisms, promote the application of the public-private partnership (PPP) model, to help build a diverse and sustainable urban financing mechanism. We need to gradually address the issue of basic public services for rural migrants, and create a mechanism to link the financial payment system for rural migrants transferring to urban areas, in order to achieve the goals for people centered urbanization."

In the last 30 years, China's record economic growth lifted half a billion people out of poverty, with rapid urbanization providing abundant labor, cheap land and good infrastructure. While China has avoided some of the common ills of urbanization, strains are showing as inefficient land development leads to urban sprawl and ghost towns, pollution threatens people's health, and farmland and water resources are becoming scarce. With China's urban population projected to rise to about one billion - or close to 70 percent of the country's population - by 2030, China's leaders are seeking a more coordinated urbanization process.

"More than any other country in the world, China has made huge progress in ending extreme poverty. It now has an opportunity to make further gains by improving the lives of the hundreds of millions residents moving into its cities," said Sri Mulyani Indrawati, Managing Director and Chief Operating Officer of the World Bank Group. "If China stays committed and implements the necessary reforms, it could become a global model on urbanization, while winning the war on pollution, sustaining high growth rates for its economy, making cities more livable and allowing more people to benefit from development."

"Managing urbanization is fundamental for China to achieve its goal to become a high-income country," said Li Wei, Director of China's Development Research Center. "Good management of urbanization is essential to unleash the potential of cities to improve efficiency and promote innovation. The key is to ensure good governance at the city level, while meeting the challenge to strengthen urban environmental protection and control pollution. It is vital to develop institutional mechanisms for efficient, inclusive and sustainable urbanization."

The report includes six priority areas for a new model of urbanization:

1. Reforming land management and institutions. Because most of the urban expansion in recent years was on converted rural land, the report says currently the amount of farmland available is close to the "red line" of 120 million hectares, which is considered to be the minimum necessary to ensure food security.

More efficient use of land will require stronger property rights for farmers, higher compensation for land requisition, new mechanisms for converting rural construction land to urban uses, and market-driven pricing for urban land allocation. Legal limits should be set up on rural land taken for public purposes by local governments. The report also recommends market-based pricing for industrial land and shifting the zoning of industrial land to commercial and residential use. This would encourage the development of the services industry and provide a stronger economic base for smaller cities and lower housing costs.

2. Reforming the hukou household-registration system to provide equal access to quality services for all citizens and create a more mobile and versatile labor force. The hukou system needs to evolve into a residency system providing a minimum standard of public service to all residents. It should remove barriers to labor mobility from rural to urban areas, as well as between cities, to help boost workers' wages.

3. Placing urban finances on a more sustainable footing, while creating financial discipline for local governments. The report recommends moving to a revenue system that would ensure a higher portion of local expenditures is financed by local revenues, such as property taxes and higher charges for urban services. Local governments, the report says, should be allowed to borrow directly, but within strict central government rules.

4. Reforming urban planning and design. In cities, basing the government prices for industrial land on market value can encourage land-intensive industries to move to smaller, secondary cities. Cities can also make better use of existing urban land through flexible zoning, with smaller plots and more mixed land use, which would lead to denser and more efficient urban development. Linking transport infrastructure with urban centers and promoting coordination among cities would encourage better management of congestion and pollution.

5. Managing environmental pressures. China already has tough environmental laws, regulations and standards, so the most important task for achieving greener urbanization is enforcement. Market-based tools, such as taxes and trading systems for carbon, air and water pollution, and energy, can also be used more to meet environmental targets. China needs to focus on "green governance" by improving institutions, as well as the incentives and instruments that enable better environmental management.

6. Improving local governance. The performance evaluation system of local officials could be adjusted to give greater incentives for a more efficient, inclusive and sustainable urbanization process. Local governments can also improve their financial management and transparency with tools such as a medium-term expenditure framework and the full disclosure of financial accounts.

"China, in the overall process of deepening reforms, needs to draw on the useful experience of other countries. Our cooperation with the World Bank Group not only provides China with recommendations for its reform agenda, by drawing on the Bank's rich knowledge resources and global development best practices, but it also allows for a platform to contribute to the sharing of development experiences between China and other countries," said Shi Yaobin, Chinese Vice Minister of Finance.

"Our close cooperation with the Development Research Center on this report has allowed us to combine our global knowledge on urbanization with in-depth understanding of China's policy challenges and provide policy advice in real time," said Klaus Rohland, World Bank Country Director for China.

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China: A New Approach for Efficient, Inclusive, Sustainable Urbanization

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BEIJING, March 25, 2014 - A new report recommends that China curb rapid urban sprawl by reforming land requisition, give migrants urban residency and equal access to basic public services, and reform local finances by finding stable revenues and by allowing local governments to borrow directly within strict central rules.

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Is this one form of the generation gap in Beijing?

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Is this one form of the generation gap in Beijing?

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China's booming economy can't keep up with its demographic crisis, as millions of new college graduates are unable to find good jobs.

Graduates live by the thousands in "intellectual slums" on the outskirts of Beijing, according to France 24.

Many residents are stuck in the slums, burdened with heavy student loans and a saturated job market.

A series of photos posted on a Chinese message board chronicle the life of young graduates in the Tangjialing slum. The post, La solitude do DanDan, includes a depressing narrative by the author.

In the long run, a more educated population will do wonders for the Chinese economy. But in the meantime, this should serve as a strong reminder of how much wealthier our society remains (for now).

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The Heartbreaking Beijing Slums That Are Filled With Young College Graduates

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China's booming economy can't keep up with its demographic crisis, as millions of new college graduates are unable to find good jobs. Graduates live by the thousands in "intellectual slums" on the outskirts of Beijing, according to France 24. Many residents are stuck in the slums, burdened with heavy student loans and a saturated job market.

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Beijing's transport authorities will limit the number of cars added to the city's roads in the years leading up to 2020 as well as adding more green vehicles to the capital's public transport system, the Beijing Daily reported Tuesday.

The Beijing Municipal Commission of Transport published Monday its transport plan for the 13th Five-year Plan period (2016-20) on its official website, saying it will invest a total of 750 billion yuan ($112.5 billion) in infrastructure projects in 49 sectors, including civil aviation, railways and urban roads.

According to the plan, the number of motor vehicles in Beijing will be kept under 6 million by the end of 2017 and will be limited to around 6.3 million by the end of 2020. This means that only 100,000 cars will be added to the city's roads each year, around one-third less than current growth.

The document also laid out plans to increase the proportion of green vehicles, such as electric buses, from 35.7 percent last year to 65 percent in 2020.

A detailed action plan is still being developed, a Beijing transport official said, adding that new rules for car license auctions, extra car registration charges, for how long licenses are valid and fees for renewing licenses have been based on the examples set by Shanghai and Singapore.

Rules on car parking and car licenses will be issued in the future to reduce the use of cars and exhaust emissions.

The plan also says that the traffic index, a real-time measure of urban traffic congestion, will be kept between moderate and severe; and commutes within Beijing's Third Ring Road by public transport will be cut to one hour on average, seven minutes less than it was in 2015.

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Beijing to limit car growth to 100k, make public transport greener

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Beijing's transport authorities will limit the number of cars added to the city's roads in the years leading up to 2020 as well as adding more green vehicles to the capital's public transport system, the Beijing Daily reported Tuesday.

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More about China's New Urbanisation Plan

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More about China's New Urbanisation Plan

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Sprawling cities, low efficiency in land use and oversized roads and squares are among the problems China plans to avoid in the next 17 years, according to the country's latest program on urbanization.

The National New-type Urbanization Plan (2014-2020), issued on Sunday by the Central Committee of the Communist Party of China and the State Council, is the country's first official plan on urbanization.

It will serve as a guideline for China's urbanization and has summarized lessons from home and abroad, said Xu Hongcai, head of the Department of Information under the China Center for International Economic Exchanges.

The plan admitted mistakes in China's urbanization since 1978, including land urbanization that has outpaced the urbanization of population, "urban diseases" such as traffic jams, low capacity in dealing with sewage and garbage, and pollution in air, water and soil, Xu said.

China's permanent urban residents make up 53.7 percent of its population, lower than the developed nations' average of 80 percent and the average of 60 percent in developing countries with similar per capita income levels as China, according to the plan.

The registered urban population, or those with city "hukou" under China's household registration system, accounted for only 35.7 percent of China's total population by the end of 2013, according to the National Bureau of Statistics (NBS).

By 2020, permanent urban residents will reach about 60 percent of the population, while residents with city hukou should account for about 45 percent of the total population, according to the plan.

The number of rural migrant workers rose 2.4 percent to 268.94 million by the end of 2013 from a year earlier, accounting for 19.76 percent of the country's total population, according to the NBS.

But they do not have access to the same public services as other urbanites with city hukou.

The government has vowed to help 100 million migrant workers and other permanent urban residents to obtain urban hukou.

"The plan has put human beings at the center of urbanization," Xu said.

The country should guide the reasonable flow of population, help rural residents become urban citizens in an orderly manner and make basic urban public services available to all permanent urban residents, it stressed.

The plan highlights ecological progress and urbanization quality, Xu added.

Pan Jiahua, director of the Institute of Urban and Environmental Studies at the Chinese Academy of Social Sciences, warned against "pseudo-low-carbon" styles.

Some cities have planned super-high buildings to improve efficiency in land use, but it takes a lot of fossil energy to bring water to a floor hundreds of meters high, making them "pseudo-low-carbon," Pan said.

China will boost construction of green cities, using ecological advancements in urban development to create green production modes, green lifestyle and green consumption modes, the plan said. Endi

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china focus: china's new plan targets quality urbanization

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China Focus: China's new plan targets quality urbanization

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Sprawling cities, low efficiency in land use and oversized roads and squares are among the problems China plans to avoid in the next 17 years, according to the country's latest program on urbanization. The National New-type Urbanization Plan (2014-2020), issued on Sunday by the Central Committee of the Communist Party of China and the State Council, is the country's first official plan on urbanization.

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Over the last decade, Beijing's dense, city-center residential alleys- hutong-have provided the backdrop for one journalistic cliché morphing into another. In the buildup to the 2008 Olympics, they represented China as cultural wasteland, with old Beijing succumbing to bulldozers, as China built the 21st-century capital it thought it should have. More recently, they've been ground zero for the Brooklynization of Beijing, as microbreweries and bamboo bikes spread across the heart of the city.

There's an element of truth to each. Wang Ruishu, a native Beijinger who recently graduated from Parsons, grew up in a hutong two miles southeast of Mao's tomb and shared a siheyuan- the classic courtyard house typical of old Beijing-with three generations of her extended family. Her parents sold their courtyard in 2005, just as she was finishing middle school.

The area was to be demolished for the 2008 Olympics. Looking back, Wang remembers mixed emotions about the move. "It was not by choice. It was because we were asked to, or forced. It was sad, but positive. It's sad that we had to leave, but for a lot of people, moving to an apartment and having a more modern living environment was a good thing."

For the older generations, it meant the end of a way of life. "My grandfather died soon after he moved out. For a lot of people his age, it was a big deal." Several years later, Wang returned to make a short documentary as part of her university application. "I felt a need to preserve something as I still remembered it. I realized that it was a part of Beijing being sacrificed to modern development, to profit. History needs to move forward, and something has to go."

Indeed, Beijing is faced with the challenge of how to modernize and create room for commercial development while also preserving these historic neighborhoods, a challenge exacerbated by poor understanding of what's actually there. Hutong preservation is part of the mission of the Beijing Cultural Heritage Protection Center (CHP), an NGO currently updating a citywide survey coordinated by the municipal government in 2005. According to American expat Rosie Levine, one of the CHP's two full-time staff, the first question her team of volunteers must answer about any given hutong is whether it still exists. They then make general notes about the architecture and living conditions, interviewing residents when possible.

'It's sad to see that Beijing is actually not different from New York, even though the demographic is very different.'

"There's a big range in how residents view the hutong, and that's important to keep in mind when doing preservation work," says Levine. For older generations, hutongs are often seen as slums: cold in the winter, hot in the summer, without running water, "smelly, tight, cramped." On the other hand, they host deep communities at the heart of Beijing culture.

At the same time, attitudes toward the hutong are changing among younger, middle-class Beijingers. Levine notes that of the around 150 volunteers that conducted the CHP's recent survey, most were young Chinese professionals who did not come from the hutong themselves. "I think there's a rising domestic consciousness around preservation, around these areas being special and unique to Beijing, especially after many of them have been demolished," she says.

Few have tracked these shifting attitudes more closely than Hu Xinyu, a hutong native who's built a career around preserving Beijing's cultural heritage. Hu served as the first managing director of the CHP before becoming manager of the Prince's Charities Foundation in China. In that capacity, he oversaw the construction of the Shijia Hutong Museum, a restored courtyard which in the early 19th century functioned as the private residence of elite literati. Post-Revolution, it was converted into a kindergarten.

For Hu, who remains involved with the CHP as an advisor, a leading concern is "getting every stakeholder engaged." He notes that there's always been enthusiasm about the hutong among the local community, regardless of age. The generational difference, he says, lies in historical memory. "I think that people born in the 1980s or 1990s don't have as big a burden. They don't have the memories of people born in the '50s or '60s, who were kicked out of their houses and lost their families' estates. When younger people approach these issues, they can be a bit more indifferent, which helps them to be objective."

Younger people also have a distinct methodology when approaching hutong history. Hu continues: "On the technical side, people born in the '80s and '90s are much more capable of doing things like using social media to promote [the hutong]. They are able to look at it from a leisurely point of view, enjoying the heritage rather than just considering it as something functional, like housing."

If a younger generation's perception of Beijing's heritage is changing, this is in part because their culture is changing the very nature of the hutong. Levine notes that the problems facing hutong preservation today are less about demolition than demographic flux, "more about gentrification than razing," she says. "There are areas that are being razed, but it's much more about change in use and changing culture."

Which brings us back to our second journalistic cliche: the Brooklynization of Beijing. Wang Ruishu, the recent Parsons grad who grew up in the hutong, now lives in rapidly gentrifying Bushwick, and sees discomforting parallels with the processes transforming her hometown. "I would have imagined it to be different, because in America the population is much more diverse. It's sad to see that Beijing is actually not different from New York, even though the demographic is very different."

Over the last decade, Beijing's hutong have transformed from residential slums into boulevards and skyscrapers, on the one hand, and on the other, into a place for young, middle-class artists and entrepreneurs to rediscover a vital zone of creative enterprise. In our next column, we'll explore the contemporary landscape of DIY art galleries, music venues, architectural design offices and tangential hipster businesses redefining the cultural value of this storied city center.
After fifteen years on Wall Street as a trader and banker, Michael Pettis moved to Beijing in 2002, where he is an economics professor at Peking University, a senior associate at the Carnegie Endowment, and the owner of 20 Percent Picture House, a private art gallery. Josh Feola moved in 2010 from the US to Beijing, where he is a writer, musician, and former booking manager at two of Beijing's leading live music venues. He has written about Chinese music and art for a variety of foreign and Chinese publications, operates the net-label Sinotronics, curates Sally Can't Dance, China's leading experimental and avant garde music festival, and plays drums in Beijing band SUBS.

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Hutong History and the Brooklynization of Beijing

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Over the last decade, Beijing's dense, city-center residential alleys- hutong-have provided the backdrop for one journalistic cliché morphing into another. In the buildup to the 2008 Olympics, they represented China as cultural wasteland, with old Beijing succumbing to bulldozers, as China built the 21st-century capital it thought it should have.

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Issues with urbanisation in Beijing (and some solutions)

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Issues with urbanisation in Beijing (and some solutions)

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IN ANCIENT times, Beijing built towering city walls that helped to prevent undefendable sprawl. These days it builds ring roads, stretching built-up areas ever outwards. Near Langfang, a city halfway between the capital and its giant neighbour Tianjin, diggers dip their heads and cement mixers churn, paving the next circular expressway. When complete, the 900km (560-mile) Seventh Ring Road will surround Beijing at such a distance that most of it will run through the neighbouring province of Hebei, to which Langfang belongs, rather than the capital itself. Parts of it are 175km from Beijing's centre (see map).

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The Seventh Ring Road (really the sixth, but for obscure reasons there is no First Ring Road) is emblematic of modern Chinese cities: giant, sprawling and dominated by cars. Even before it is completed in a year or two (and its use assessed), another, even longer, orbital is being plotted. Like many of China's infrastructure projects, the new road displays engineering prowess. The country's successes in urban planning are less evident.

Breakneck urban growth has propelled China's rise in the past three decades. Migration from the countryside has helped expand the urban population by 500m-the biggest movement of humanity the planet has seen in such a short time. Over half the population is now urban. Some live in the basements of apartment blocks, or in shacks built in courtyards. But Chinese cities have mostly avoided the squalor of many developing-world ones.

The result of this urban growth is not just that China has many large cities-more than 100 of them have more than a million people-but that some are supersized. At the end of last year the government at last acknowledged the special nature of these, introducing the term "megacity" to describe those whose populations, including that of their satellite towns, exceed 10m. Of the 30 cities worldwide that match this definition, six are in China: Shanghai (23m), Beijing (19.5m), Chongqing (13m), Guangzhou (12m), Shenzhen (11m) and Tianjin (11m). A further ten Chinese cities contain 5m-10m people. At least one of these, Wuhan, will pass 10m within a decade.

China depends on its cities for economic growth and innovation. But it is failing to make the most of its largest conurbations. Medium-sized agglomerations of 1.5m-6.5m are outperforming bigger ones in terms of environmental protection, economic development, efficient use of resources and the provision of welfare, says McKinsey, a consultancy. Residents are beginning to question whether their quality of life, which for many has improved by leaps and bounds, will continue to do so. The giant cities are polluted, pricey and congested. Average travel speed in Beijing is half that in New York or Singapore.

Most of China's cities share the legacy of a central-planning mindset in which all life and work was centred on a single "work unit". Cities were "built as producer centres rather than consumer ones", says Tom Miller, author of "China's Urban Billion". Their planning focus was on industry; not commerce, services or even community. The work units are gone but the tradition of dehumanising architecture persists. Most new developments are built on giant blocks 400-800 metres long.

China has swapped its socialist dream for an American-style one of cars and sprawling suburbs. The number of cars has increased more than tenfold in the past decade, to 64m. The combination of superblocks and car-lust often adds up to a giant jam. Large blocks mean fewer roads to disperse traffic. Guidelines require a main urban road every 500 metres and an eight-lane road every kilometre. In the case of Beijing, a ring and radial system was also created, with the aim of providing speedy road access in and out of town, bypassing city traffic and linking satellite towns. Not a bad idea, except that workplaces have remained concentrated in the centre. The expressways funnel traffic into gridlock.

The ill-defined ownership rights of farmers have encouraged the sprawl. Officials can expropriate rural land easily and at little cost. Doing so is far cheaper than redeveloping existing urban areas. Industrial land is heavily subsidised, so factories have remained in urban areas rather than move to cheaper sites on city outskirts. The amount of land classified as urban has more than doubled since 2000-40% of new urbanites became so when cities engulfed their villages.

Sprawl has resulted in populations becoming more thinly spread. China's megacities are less dense than equivalents elsewhere in the world (see chart). Guangzhou could contain another 4m people if it was as packed as Seoul in South Korea; Shenzhen could be larger by 5m. Extending outward takes a toll: slow commutes from far-flung suburbs increase fuel consumption and cut productivity.

Massive spending on infrastructure has hugely improved connections within and between cities. Since 1992 China has spent 8.5% of its national income on infrastructure each year, far more than Europe and America (2.6%) or India (3.9%). Yet city residents still complain. Subways are often built as engineering projects, with stops at set distances, rather than where people want them to be, says Sean Chiao of Aecom, an infrastructure firm. Buses, metros and rail networks are poorly integrated because separate agencies manage them.

Planners often ignore the needs of 200m or more residents who have no urban hukou, the household registration certificate that is needed for access to public services. Cities therefore have inadequate hospitals, schools and affordable housing.

This year, however, the central government has started to downplay the importance of GDP growth in assessing the performance of local officials. That should free them to spend more money on making cities better places to live, rather than on laying concrete. Some cities now seek to limit car use. Beijing is mulling a congestion zone. To limit pollution and improve traffic flow, eight cities (including all megacities except Chongqing) cap the number of new licence-plates they issue. Several cities ban some drivers one day a week. Metro systems are fast multiplying: Beijing alone opened four new lines with 41 new stops in December.

More could be done. Parking in city centres remains far too cheap, and laws should be enforced to curb a habit of parking on pavements or traffic islands. Buses could be made to use the central lanes of broad boulevards. Bicycle-use should be encouraged by reintroducing once ubiquitous cycle lanes.

The World Bank says that, at 54%, China's degree of urbanisation is still well below the 70% expected of a country with its current income level per person. The flood of migrants will continue; by 2030 Chinese cities will contain more than 1 billion people. A change of thinking will be needed to make them better places to live in.

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IN ANCIENT times, Beijing built towering city walls that helped to prevent undefendable sprawl. These days it builds ring roads, stretching built-up areas ever outwards. Near Langfang, a city halfway between the capital and its giant neighbour Tianjin, diggers dip their heads and cement mixers churn, paving the next circular expressway.