Lessons From China’s New Urbanization

This post was originally published in the Washington Business Journal’s WBJBizBeat Blog. | Washington Business Journal

Chevy Chase Trust takes keen interest in long-term secular themes that can be the catalyst for investment ideas. Here is one: urbanization.

A recent article in the British newspaper The Telegraph reported that by merging nine cities that lie around the Pearl River Delta, China is planning to create a metropolis of about 42 million people in a 16,000-square-mile urban area (Imagine a city 26 times geographically larger than London!). The “Turn the Pearl River Delta Into One” plan will cover a large part of China’s manufacturing heartland, stretching from Guangzhou to Shenzhen and including seven other cities. Together, these cities already account for approximately 10 percent of China’s economy.

“The idea is that when the cities are integrated, the residents can travel around freely and use the health care and other facilities in the different areas,” said Ma Xiangming, the chief planner at the Guangdong Rural & Urban Planning Institute and a senior consultant on the project. Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together at a cost of about $300 billion. Twenty-nine rail lines, totaling 3,100 miles, will be added, cutting rail journeys around the urban area to a maximum of one hour between different city centers. Thus, the amalgamation of these cities will improve transportation around the region, eliminate bureaucratic restrictions and improve efficiency and productivity. It is estimated that phone bills will plummet by about 85 percent.

China seems ready to take advantage of a concept economists call “agglomeration economies” – the benefits that firms and people enjoy from close proximity to one another; sometimes known as the “clustering effect”. Jonah Lehrer of The New York Times wrote an article last December on the thinking of Geoffrey West & Luis Bettencourt – two physicists that have done a tremendous amount of research on the benefits of agglomeration. As Lehrer reported:

In city after city, the indicators of urban “metabolism,” like the number of gas stations or the total surface area of roads, showed that when a city doubles in size, it requires an increase in resources of only 85 percent.

According to the data, people who live in densely populated places require less heat in the winter and need fewer miles of asphalt per capita. (A recent analysis by economists at Harvard and U.C.L.A. demonstrated that the average Manhattanite emits 14,127 fewer pounds of carbon dioxide annually than someone living in the New York suburbs.) Small communities might look green, but they consume a disproportionate amount of everything. As a result, West argues, creating a more sustainable society will require our big cities to get even bigger. We need more megalopolises.

Whenever a city doubles in size, every measure of economic activity, from construction spending to the amount of bank deposits, increases by approximately 15 percent per capita. It doesn’t matter how big the city is; the law remains the same. “This remarkable equation is why people move to the big city,” West says. “Because you can take the same person, and if you just move them to a city that’s twice as big, then all of a sudden they’ll do 15 more of everything that we can meaure.”

A growing city makes everyone in that city more productive, which encourages more people to move to the city, and so on. According to West, these superlinear patterns demonstrate why cities are one of the single most important inventions in human history…“As cities get bigger, everything starts accelerating…”

Two of China’s most important cities, Beijing and Tianjin are currently being ringed with a network of high-speed railways that will create a super-urban area known as the Bohai Economic Rim. Its population could be as high as 260 million. As this new mega-urbanization process gathers pace, total investment in urban infrastructure over the next five years is expected to reach at least $1 trillion, with an additional $476 billion spent on high-speed rail and $200 billion on other urban transport.

China’s push towards creating megacities will continue to increase its demand for base metals, agricultural products and other commodities, but will also help move more people into the middle class while using fewer resources.

In 2009, for the first time in history, more than 50% of the world’s population was urban. This trend is clearly permanent and accelerating.

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