China’s 260 million new spenders may save economy

July 30, 2016

By Dhara Ranasinghe, CNBC

Steps that encourage China's 260 million migrant workers to settle into cities should help turn them into urban spenders and underpin growth amid worries of a sharp slowdown in the world's second biggest economy, a new report from HSBC suggests.

China's economy grew an annual 7.5 percent in the second quarter of the year, slowing for a second straight quarter, while recent weak economic numbers have fanned concerns about a hard landing or steep slowdown in the Asian powerhouse.

Analysts at HSBC said that the hard landing worries are overblown as China is still in a position to buffer the slowdown with stimulus measures. They add that Beijing can also undertake steps that unleash the growth potential of urbanization.

"Encouraging migrant workers to settle in cities will help turn them into urban spenders, hence lifting private consumption," HSBC said in the note published on Monday.

"Meanwhile, access to better welfare will lure more surplus farmers to urban sectors, especially considering the large rural-urban income gap. We expect another 100 million people to leave their villages for cities in the next decade, providing a new source of sustained growth in labor productivity and, therefore, the economy," they said.

China's urbanization rate, the percentage of the total population that lives in urban areas, rose to 52 percent last year from 20 percent in 1980. But the real ratio is probably about 35 percent because most of the 260 million rural migrant workers have not yet settled into cities, according to HSBC.

Analysts said that Beijing's urbanization plan is key to turning migrant workers into city dwellers whose consumption should help bolster the economy. After three decades of rapid expansion, China's government is trying to shift the focus of the economy away from investment and exports to consumption in a bid to put the economy on a more secure long-term footing.

HSBC identifies a couple of steps in Beijing's urbanization program that are especially important such as reforming the household registration system which it says would help remove social welfare and other types of discrimination against migrant workers.

"Land reform is also essential because it will not only encourage migrant workers to settle in cities, but lift agricultural productivity," HSBC said. "We expect Beijing to start a pilot program of land reform in the coming months."

China's new generation of leaders,who officially assumed power in March after a period of transition, have shown some signs of stepping up the pace of economic reforms as well as tolerating a slower pace of growth to allow a structural adjustment in the economy to take place.

At the same time Beijing has made some efforts to ease concerns about a hard landing for the economy, introducing a mini package of stimulus measures earlier this month.