5 Oct 2017 05:30pm

The barriers to Chinese growth

The slowdown in China’s rural-urban migration has raised concerns about the economy’s growth prospects amid warnings that surplus labour has been exhausted. Analysts from Oxford Economics consider if such worries are overdone

For nearly the past three decades, China has seen significant migration from rural areas to cities – a key driver of its urban development. However, the total migrant population (including all inter-city migration and rural-urban migration) fell for the first time in 2015, decreasing by 6 million; it dropped by 2 million in 2016.

The decline is largely due to slowing growth in rural migrant workers, who make up nearly 70% of the total migrant population. However, while growth in rural-urban migrants has fallen steadily since 2010, there has been more rapid growth of locally transferred rural labourers recently. This underscores the changing dynamics of migration within China and the reallocation of labour from the agriculture sector to other industries.

As a result of falling birth rates, China’s working-age population has been in decline since 2012, with the number of people aged between 15 and 29 down by an average of 6 million per year over the past five years. With about one-third of migrant workers aged below 30, fewer young people entering the workforce has led to slower rural-urban migration.

Weaker economic growth in large cities has led to slower urban job creation, in large part due to the retrenchment of industrial employment that drove some low-skilled rural migrants out of the urban job market. Nationwide, the number of industrial jobs fell by 9 million during 2013-2016, in sharp contrast to services employment, which grew by 61 million during the same period. High-frequency data on industrial employment shows a notable slowdown in manufacturing employment since 2010, led by a slump in heavy-industry sectors suffering from excess production capacity and weak global demand.

Improved living conditions in rural areas have also played a role. Since 2013, rural per capita disposable income has grown at an average rate of 8% year on year in real terms, outpacing urban income. Over 55 million rural residents have been lifted out of poverty and the government has significantly increased spending on improving rural infrastructure and public services, including establishing a basic rural pension system and providing medical insurance.

Greater prosperity in rural and semi-urban areas has fostered and diversified economic activity. There has been a rise in new entrepreneurs, helped by government policies such as tax reductions and state-subsidised loans. In 2016, about two million rural migrants returned home from cities to start businesses, according to Yang Zhiming, a former vice minister of the Ministry of Human Resources and Social Security.

High living costs in urban centres have become a key consideration for rural migrants, many of whom are low-income earners. So, for many migrants – typically married couples who left their elderly parents and children behind in rural areas – the benefits of returning to rural areas outweigh the costs of staying in cities.

Migrants’ rural “hukou” household registrations can also influence their decision to leave cities, as registrants are tied to entitlements allowing them to freely use a share of rural land.
But the decline in traditional migration in recent years has been accompanied by an increased flow of labour out of the agriculture sector and into other industries, especially the services sector, which are closer to rural areas. Weaker labour demand in urban centres amid a cooling economy is what has contributed to lower rural-urban migration, not a constraint on labour supply. Once labour demand picks up again, rural-urban migration is likely to regain pace.

Concerns that China’s growth prospects are threatened by an exhaustion of surplus labour are misplaced. With the country’s low-productivity agriculture sector accounting for 28% of employment and much urban labour underutilised, China is still far from having labour shortages.

We expect the flow of rural migrant labourers to urban areas to remain subdued. But the fall in the traditional rural migrant population will continue to be partly offset by the rise of locally transferred rural labourers. New sources of economic growth will emerge as entrepreneurial and wealthier migrants return to rural areas, creating more and alleviating the huge rural-urban income disparity.
Declining flows of rural migrants will take pressure off China’s overstretched megacities, particularly in housing and public services, enhancing resource allocation efficiency.

Tianjie He and
Louis Kuijs𠊊re economists for Oxford Economics, oxfordeconomics.com