The rise of megacities has created slums and chaos elsewhere, but in China, they are cleaner and more efficient.
As China continues to boom in the coming decades, it would be well advised to think big. Big cities, that is. So far the migration from rural areas that has driven China's growth has fed the rise of many cities, and this scattered pattern is magnifying the key problems of urbanization: pollution, environmental destruction and the dislocation of farmers from land around cities, which is producing a growing number of agrarian protests. The development of megacities--which, granted, have produced chaos in other countries--would in fact produce a cleaner, more socially stable and faster-growing economy in China. Bigger is better for China due to its unique development pattern. Some foreign observers assume that China has urbanized successfully, so far, because it has a strong central government that can impose conformity even in the smallest village. And that was true in the past. However, after China began to embrace economic reform and openness after 1978, it relaxed the internal passport system called hukou to ensure a plentiful supply of labor in economic hot spots. To this day, China's economic liberalism has gone hand in hand with a policy of unleashing local dynamism, and explicitly encouraging entrepreneurial city leaders.
No single factor has been more powerful in driving urban expansion than the freedom cities have had to buy and sell land. That feature helps to explain why China has largely so far escaped the slums that have disfigured rapidly expanding cities elsewhere in the world. In other countries, from Brazil to India, an influx of migrants to cities has come first; local governments have then relied on the tax system to play catch-up in building the urban infrastructure.
In contrast, Chinese cities have been able to finance a "build it and they will come" approach, partly because of central-government transfers from China's prodigious savings and partly because of local land transactions. Until recently, China's city leaders have had carte blanche to acquire surrounding countryside cheaply and then sell this land, still at steep discounts, to incoming businesses and real-estate developers, using the proceeds to boost competitiveness and job creation and to build the urban infrastructure. The McKinsey Global Institute (MGI) estimates that over the past decade land sales have accounted for up to 60 percent of annual revenues in some cities. The jobs created by incoming businesses have then acted as a magnet to migrants. Since 1990, China's urban population has doubled, but its urban land area has grown by 150 percent.
The golden goose of land acquisition and sale may now have its wings clipped. Concerned by social unrest among displaced farmers, China's central government has instituted new controls on this practice. Local mayors may no longer rely on this source of revenue and will thus find it far harder in future years to finance urban construction. Yet the demands on the public purse will be growing inexorably. China's cities need to find the money to extend social coverage to its huge migrant populations (which, in many cities, will account for more than 40 percent of their populations by 2025) at a cost MGI estimates will reach an additional 1.5 trillion renminbi by 2025 (about $215 billion at today's exchange rate), or almost 2.5 percent of urban GDP. At the same time, cities need to fund the continuing buildup of infrastructure and mounting bills for tackling the dark side of urbanization: pollution and congestion.
Over the past 17 years, more than 100 million people have moved from the countryside to rapidly expanding urban centers. So far urbanization has followed a dispersed pattern, with many cities scattered across inland to coastal China and from north to south, all growing in parallel. In 2005, according to MGI's assessment, China had …