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Perry Wong lores
Perry Wong
Managing Director, Research
Asia and California and China and Energy and Human Capital and Regional Economics and Technology
Perry Wong is managing director of research at the Milken Institute. Wong is an expert on regional economics, development and econometric forecasting and specializes in analyzing the structure, industry mix, development and public policies of a regional economy.
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Michael Lin lores
Michael Lin
Senior Associate, Regional Economics Research
Human Capital and Regional Economics
Michael Cheng-Yi Lin is a senior associate at the Milken Institute. His current research focuses on human capital as well as community, urban, and regional planning and development.
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Medium and Small Cities Will Drive China’s Growth 

By: Perry Wong and Michael Lin
September 14, 2015
   
   

In the 1980s, most Westerners, even well-traveled businesspeople, would have been hard-pressed to name any cities in China other than Beijing, Shanghai, Guangzhou, and Shenzhen. Today, many would be eager to share their experiences of business trips to Yichang or vacations in Huangshan. Indeed, the number of cities in China, and their economic importance, are on the rise. Since 1985, China’s urban areas have more than doubled to roughly 700. According to the World Bank, the urban population accounted for more than half of the nation in 2011, and China recently set the goal of reaching 60 percent urbanization by 2020.

Urbanization has contributed substantially to China’s astounding GDP growth, which has registered approximately 10 percent annually in the last three decades. While large cities have been the driver and received most of the credit, the Milken Institute is bringing attention to the increasing economic importance of medium-size and small cities with the release of the inaugural “Best-Performing Cities China” report and ranking. BPC China2015forWEB 1With the ongoing buildout of infrastructure and market-oriented economics that encourage investment, consumption, industrial diversification, and innovation, we expect these cities to continue to advance.

Currently, despite surging urbanization and the Go West initiative, construction and wealth accumulation are still concentrated in eastern China, particularly in the large coastal cities. Three urban clusters—the Yangtze River Delta, the Pearl River Delta, and the Jing-Jin-Tang—have been predominant. To date, they have been responsible for China’s economic progress. Yet such regional concentration has created environmental, social, and economic tensions such as traffic congestion and high housing prices. The lack of geographic diversification also makes the nation more vulnerable to economic malaise. 

As they develop, medium-size and small cities can help mitigate the stresses that afflict major cities and strengthen China by adding growth engines across the nation. The less-developed status of these third-tier cities also signals certain advantages, such as lower business operating costs, untapped market potential, and locations that enable them to link other centers together. However, even within this group, the levels of development vary widely. Some top cities in our ranking, such as Suzhou (No. 1) and Taizhou (No. 5), have cultivated their transportation networks and diversified their industries and talent pools, which in combination may support their long-term growth. Others, such as Qingyang (No. 6) and Ordos (No. 13), have relatively less developed infrastructure and fewer industries, which may present challenges for their future economic health. 

To expedite development of third-tier cities in China, central government support in building infrastructure (e.g., transportation, electric power, etc.) and the industrial base will still be crucial. However, as Chinese cities advance in number, size, and strength, their complexity may create a mismatch between overly centralized planning and efficient economic outcomes.

As China evolves from world factory to a more knowledge- and technology-based economy, its cities are no longer simply production-and-export hubs. They are also becoming consumption and innovation centers. In addition to leveraging government investment, the more open urban economies are likely to enjoy advantages in attracting private investment and talent. Market-oriented approaches to development, we believe, can help diversify local industrial bases, making them more competitive and differentiating them within China’s vast economic landscape.