Beijing has been slow to remove policy restrictions on the development of large cities since the 1949 revolution, only abandoning such limitations in the late 1990s.The urbanisation ratio subsequently increased by 13 percentage points: from 33.3 per cent in 1998 to 46.6 per cent in 2009. In particular, the number of mega-cities — those with a population of one million or above — increased from 81 to 124, whereas the number of smaller cities decreased from 587 to 530. Despite these changes, studies still indicate an underdevelopment of mega-cities in China.

Large cities have positive externalities stemming from agglomeration effects. These effects come from more efficient trade and lower transport costs led by population concentration and larger-sized markets for goods, inputs and production factors; more efficient use of land and infrastructure; industrial cluster effects; stronger spill-overs of information, knowledge and technology; and higher productivity resulting from better-developed service sectors.

But large cities also have negative externalities owing to transport congestion, environmental pollution, higher living costs and the deterioration of living conditions of residents, which all result from high population density and industrial concentration. Therefore, a key issue is how to optimise city scale while taking these positive and negative externalities into account.

China’s concentration ratio — the proportion of China’s population living in mega-cities — was 20.4 per cent in 2007, which is four percentage points lower than the world average, and eight percentage points lower than its predicted value given the current economic development level and other conditions in China. It is predicted that 32 per cent of the Chinese population will live in mega-cities by 2020, reaching 37 per cent by 2030. These concentration ratios, although significantly higher than the present level in China, are still below present levels in the US and Japan (at 43 per cent and 48 per cent, respectively).

A common argument in China claims that further increases in the population of mega-cities will see them become overcrowded. But their average population size could remain unchanged as long as the number of mega-cities grows rapidly enough. For this to be the case, the number of mega-cities would need to double—from the current number of 124 to about 250. More realistically, both the average population and the number of mega-cities are likely to increase over time.

Most of these new mega-cities will develop from the current medium-sized cities, or even small cities. And over time new super economic and population centres might emerge, besides the current Yangtze River Delta, Pearl River Delta and Beijing-Tianjin-Hebei region, such as the Chongqing-Chengdu and Wuhan-Changsha areas.

For this to materialise, future policy adjustments will need to remove restrictions that hinder the urbanisation process.

First, a more neutral urbanisation policy should replace current government policy preferences towards the development of small cities and towns. Some of the preferential policies enjoyed by a small number of selected large cities (especially Beijing, Shanghai and some provincial capital cities) should also be removed. Population and resources flowing into large cities, led by market forces, are usually indicators of improvement in resource allocation, and should not be redirected by government restrictions.

Second, the urban household registration system, which hinders rural–urban migrant workers from receiving coverage under the urban social security and public services systems, should be reformed. The provision of public services should be equalised among migrants and original urban residents.

Third, the role of government in urban development should, in general, complement market forces. But due to the positive and negative externalities of urban economies, the government still needs to play an important role in, for example, urban planning and infrastructure improvements.

Fourth, some mega-cities might become oversized as certain negative externalities arise, and this is unlikely to be automatically corrected by market forces. International experience shows that once a city becomes oversized its transport conditions and living environment deteriorate, and both living costs and production costs increase. The government should encourage the development of second-tier cities and small cities in the surrounding areas to alleviate migration pressure towards these super mega-cities.

And finally, a better road network — especially better intercity transport systems—may reduce the migration pressure towards oversized super mega-cities. Better transport conditions can enable people to live in nearby smaller cities and, at the same time, enjoy the better services provided in the larger cities.

A market-friendly urbanisation policy framework, together with carefully designed government measures to deal with potential positive and negative externalities, will accelerate the urbanisation process in China. At the same time, this will improve the efficiency of the urban economies and thereby play a critical role in sustaining China’s long-term development.

Xiaolu Wang is Deputy Director and Senior Fellow at the National Economic Research Institute of the China Reform Foundation, Beijing.

Xiaolu Wang’s research was presented at China Update 2011.The annual China Update conference is hosted by the China Economy Program, in collaboration with the East Asia Forum, at the ANU in July. This article is a digest of Xiaolu Wang’s chapter, ‘The Route of Urbanisation in China from an International Perspective’, in Jane Golley and Ligang Song (eds), Rising China: Global Challenges and Opportunities (ANU E Press, 2011), available in pdf here. This book is the latest publication in the China Update Book Series, launched at the China Update conference every year.