Progress on China’s Structural Rebalancing and Reverse Migration

08 Nov 2017

Progress lies not in enhancing what is, but in advancing toward what will be.

Khalil Gibran

Summary

  • The initial trends that started more than a decade ago in rebalancing income and investment growth, urbanisation and industralisation from the eastern part of the country to the poor west seem to be gaining traction.
  • Evidence on some interior parts of the country, notably the southwest, shows that income has risen and cities have been modernised steadily.  Economic prospects have improved so much that a reverse migration trend has developed; this trend has not entered mainstream thinking so far.
  • Industrial migration towards the inland will likely generate growth momentum to offset some of the growth drag from structural reforms and deleveraging efforts.  All those hand-wringing over China’s huge debt overhang may have overstated the country’s efficiency loss problem.

Back in 2013, I argued that China’s domestic sector had started a slow structural rebalancing process since 2005, with income growth, investment and industrialisation shifting inland, resulting in regional division of labour. Bottom up data (in terms of local business growth, tourism and consumption etc.) shows that the economic performance of some interior provinces, notably Guangxi, Sichuan and Yunnan, has been striking, underscoring the entrenchment of the structural rebalancing trends.

“Go West” policy’s lagged effect

Beijing launched the “Go West” development strategy in 2000 to redistribute growth momentum from the east to the west through infrastructure spending.  This has led to industrial migration towards the inland provinces.  In most of the decade that followed, many workers migrated from the inland provinces to the coast and western provinces such as Guangxi, Sichuan, and Yunnan actually suffered from declining population growth.

But by around 2010, the cumulative effect of infrastructure spending on attracting growth to the west finally emerged, with population growth in the key western provinces outpacing that of the east.  This phenomenon underscores a new trend of reverse migration from the major cities back to the towns and villages.  This trend is set to continue, as Guangxi and Yunnan have been designated by Beijing as the bridgeheads under the Belt and Road initiative for connecting China with Southeast Asia.

Reverse migration

Official data shows that the growth of migrant workers has been slowing down since 2010, and the declining trend has accelerated since 2012.  The falling trend in urban migration may reflect the slowdown in economic growth as China moves into the “new normal” environment under President Xi Jinping’s structural reform programme which reduces industrial demand for migrant workers.  But it may also be a result of the government’s hu kou, or household registration system, reform that reclassifies the status of some migrant workers to urban residents.

Moreover, as economic development spreads from large cities to small cities and towns (as per “Go West” policy), many older rural migrants (those over 40) are finding work in these areas that are closer to their rural hometowns.  They prefer to move back to their hometowns after spending years working in faraway big discriminatory cities, and now they find that many of the city amenities are also available in small towns and villages close to home but at much lower cost than in the major cities.  Rather than a negative sign for growth, this reverse migration trend reflects progress on economic rebalancing spreading growth to small cities, towns and villages.

According to official data, there were 277 million migrant workers in the country in 2015 (about 36% of the working population).  But only 40% of them actually moved to work in cities far away from their hometowns.  The rest did non-farm work in small cities near their home villages; these are called local migrants who do not travel far away to find work in big cities.  The size of this local-migrant-worker pool has been increasing on the back of a decline in the overall growth of the migrant-worker population (see Chart 4), suggesting that many rural workers are giving up their big-city dreams and are moving back from the big cities since they can now find non-farm work in small cities nearby.

The incentive for reverse-migration is getting stronger as economic rebalancing has spread to the local economies by offering non-farm work and urban facilities at a fraction of the cost of the big cities.  Many local migrants work in the nearby small cities as day labourers and go home at night.  This development allows migrant workers to retain the “safety net” of their rural land, which they will have to surrender when they move to big cities and become urban citizens.

A two-edged sword

Beijing is even encouraging reverse migration by offering tax incentives for the returning migrants to set up businesses.  The purpose is to make use of the returning migrant’s skills and savings gained by working in the cities to help rebalance growth to the local economies.  It also hopes that the returning migrants would buy homes in the small cities and towns so as to help absorb some of the large housing inventory.  The ultimate goal of reverse migration is to accelerate the move of household income up the income thresholds and, thus, encourage consumption of high value-added goods and services.

However, if the returning migrants merely retire to their villages, the economic impact will be small.  The trend may even backfire on economic growth since migrant workers earn more than farmers or non-farm work offered by the small cities.  A fall in migration to the cities could reduce earnings and, hence, remittances back home.

The reverse-migration trend is still in the early days, so its impact on China’s growth is still uncertain.  Migrant workers may not be the driving force of growth that they once were, but neither is it sustainable for rural workers to keep flocking to the cities indefinitely.  From a macroeconomic perspective, if the slowdown in growth in the “new normal” environment due to economic rebalancing encourages more migrant workers to move back home to set up businesses and work, reverse migration may actually deliver a benign growth outcome over the long-term.

The debt overhang may not be that bad

While there are concerns about China’s large debt-financed growth and the resultant economic wastage, these trends of economic rebalancing and the accompanied income gains are real.  Many Chinese cities are more prosperous and livable than they were a decade ago, thanks to the westward migration of industralisation and investment in housing and infrastructure.  This underscores my earlier argument that debate on China’s debt should not be just focused on the liability side of the economic balance sheet.  We also need to heed the asset side, which has positive growth implications.