China’s Supercities Boom and the Next Era of Urban Growth

The first wave of urbanization in China played no small role in the country’s economic transformation over the past four decades. As rural populations migrated to cities, manufacturing centers followed behind, increasing China’s opportunities in global supply chains, boosting productivity and spurring the country’s middle class.

Now, Morgan Stanley Research finds that a second wave of urbanization driven by smart tech “supercities"—regional clusters of giant hub cities surrounded by large satellite cities—could hold the key to giving China a new gear for growth, with significant implications for investors and the global economy.

“In our view, China is poised to be a global leader in smart city and city cluster development," says Robin Xing, Morgan Stanley's Chief China Economist. In a recent Morgan Stanley BluePaper, Xing and a cross-section of colleagues examined at how the confluence of government reforms, infrastructure spending and technology adoption are building what they call Urbanization 2.0.

This shift has implications for a host of sectors such as telecommunications, tech, agriculture, utilities and more. “In the shorter term, urbanization-related investment is key part of China’s countercyclical stimulus efforts," Xing adds. “Longer-term, these smart urbanization trends will help sustain productivity growth and mitigate the structural growth headwinds from an aging population."

Morgan Stanley projects that China’s urbanization ratio could increase from 60% currently to 75% by 2030, translating into 220 million new urban dwellers. Half of these inhabitants would settle in five super-city clusters. This continued urbanization could help keep total factor productivity growth at a relatively high compound annual growth rate of 1.6% through 2030 (vs. 1.9% in 2014-18). As a result, China's annual per-capita income could more than double by 2030.

China's Sustained Pace of Urbanization Toward 2030
(Urbanization Ratio, %)

This trend toward urbanization in China has been underway for four decades. In 1978, more than 80% of China's population lived in rural areas, where education and vocational training were sparse and costly.

Today, roughly 60% of the population live in urban areas. That trend should continue for a number of reasons, including Hukou reform. In China, Hukou is essentially city resident permit, which provides access to a social security system providing pensions, healthcare and education in cities. Until recently, it had been difficult for rural residents to obtain Hukou in cities. But since 2016, the Chinese government has started to loosen restrictions in smaller cities, incentivizing people to relocate to urban areas.

Meanwhile, the urbanization strategy over the past two years has been shifting to focus more on promoting mega-clusters in advanced regions, such as Yangtze River Delta; Jing-Jin-Ji Area; Greater Bay Area; Mid-Yangtze River Area; and Chengdu-Chongqing Area. This strategy would be distinct from past regional rebalancing initiatives (including 'Western Development' since 2000 and 'Northeast Revitalization' since 2004), which were mainly aimed at reducing regional income gaps and relieving pressure from population inflows into developed coastal regions. 

China's Top 5 City Clusters Are Larger Than Most EU Countries
(Population Size in Millions)

Morgan Stanley expects total population of China’s top five city clusters to reach 120 million on average by 2030—each close to the size of Japan's entire population. These city clusters are central to boosting productivity as they amplify the efficiencies of urban agglomeration.

There are concerns that life in these supercities could face a litany of problems from overcrowding, pollution and crime. But a vital part of China’s urbanization strategy is to make these supercities green, smart and safe. To that end, the Chinese government is investing an estimated $800 billion in high-speed rail, autonomous electric vehicles, smart grid technology, shared mobility, powerful 5G networks and big data technologies toward 2030.

As envisioned by the planners, this modernized China could see city dwellers commuting to work more rapidly via high-speed rail and automated vehicles on smart grids.  Homes could become more automated, too, with smart IoT appliances running on a next-generation 5G network.  And artificial intelligence and big data analytics could better match healthcare resources with patients, create cloud hospitals and improve the accuracy of diagnosis.

“Over the longer run, more advanced smart city features, such as driverless cars, auto-delivery drones, and fully interconnected and automated home appliances should take productivity to the next level," says Shawn Kim, head of Morgan Stanley's Asia Technology research team. All told, these efforts are expected to sustain annual productivity growth at 1.6% through 2030.

More Frequent and Shorter-Distance Travel Within City Clusters
(Average Railway Travel Distance Per Person, Km)

Morgan Stanley equity analysts across a number of sectors say China's transition to an urbanized supercity model presents three attractive investment themes going forward:

• Consumer to Industrial Internet: telecoms, internet, tech hardware and software
• Digitalization of the Old Economy: autos, logistics, utilities, banks, insurance, agribusiness
• Smart City Lifestyle: transportation, property, materials, consumption, education, healthcare, Macau gaming, tourism

Virtually all of these themes hinge on the expansion of 5G wireless networks. “The capacity of the 4G network in supercities would be grossly inadequate because of the dense number of users per kilometer," says Gary Yu, Head of Asia Telecoms Research.. “The 5G network will add, by some accounts, more than 10 times that capacity."

Globally, telecom operators struggle to identify business cases to monetize 5G investments, but China's smart cities will emerge as an early pilot project. Morgan Stanley estimates that 5G-related investments will total $400 billion between 2019 and 2030.

As supercities take form and the demand for industrial internet grows, investors should keep their eyes on the related industries: 5G infrastructure, public cloud, Internet of Things (IoT) devices, and software.

The rise of supercities could also prove transformative for the auto segment, shared mobility, electric vehicles and autonomous vehicles. Morgan Stanley analysts covering China's auto industry forecast that by 2030, 27.6 million passenger vehicles could be used for shared mobility in China—10% of the country’s vehicle population—compared to just 2% in 2018. Additionally, a third of passenger vehicles sold in China in 2030 could be electric, up from 4% in 2018 and 20% of personal vehicles sold in 2030 will feature autonomous driving, compared with none in 2018.

While high-speed trains and electric vehicles should help keep transportation-related emissions at bay, the Chinese government has already moved toward modernizing its utilities with an emphasis toward clean energy and energy security.

In 2016, the government launched an aggressive energy strategy around non-fossil fuels, and has since made steady progress toward the goal of reaching 50% non-fossil fuel production by 2030 as the country develops its grid for creating and distributing clean energy.

Overall, the scale and speed of China's transition to technology-driven supercities should offer new opportunities to global investors. As China navigates the challenges of creating a cleaner, more efficient economy led by clusters of densely populated areas, necessity will increasingly drive technology and create new investment themes over the next decade from high capacity industrial internet to modernization of autos, logistics, utilities and the creation of smart cities enhanced by data.

For Morgan Stanley Research on Chinese supercities, ask your Morgan Stanley representative or Financial Advisor for the full report, "The Rise of China's Supercities: New Era of Urbanization" (Oct 10, 2019). Plus, more Ideas.