How Economic Geography Determines China’s Future

Economic agglomeration has been a defining feature of the Chinese economy. It was an advantage that China readily capitalized on to build the formidable coastal manufacturing ecosystems that are now highly competitive.

Our research has already shown that 25% of Chinese cities account for all the population growth over the last decade. In coming years, as the national population declines, even fewer cities will see net population growth. Population will instead further concentrate in two superstar regions—in large part because listed firms, especially high-tech firms, are increasingly agglomerating there.

That distribution of companies will shape the future distribution of Chinese population for the simple reason that people will naturally move to where the jobs are. It’s a virtuous cycle for the superstar regions, particularly the Yangtze River Delta (YRD) and the Pearl River Delta (PRD), but a pernicious one for the rest of the laggard regions that can’t break this cycle.

What this means is that in coming years, about 10% of Chinese cities will be the engine of productivity and growth, in effect subsidizing the other 90% that will struggle with demographic factors and mediocre economic performance.

The force of agglomeration is unlikely to be reversed anytime soon, creating dynamics that will likely reshape China’s regional development strategy. For better or worse, Beijing will likely have to prioritize focusing on growth regions over narrowing regional disparities.

All About The Deltas

To see agglomeration in action, the concentration of A-share listed firms can reveal insights. In the decade between 2010 and 2021, the concentration of total listed firms in the YRD and PRD rose from 42% to 50% (see Figure 1).

Figure 1. Listed Companies Are Concentrated in Two DeltasSource: Author.

The concentration of high-tech firms is even more pronounced. Take the 400 firms listed on the Shanghai Stock Exchange Science and Technology Innovation Board (STAR), China’s NASDAQ equivalent—50% of them congregate in just three YRD cities: Shanghai, Suzhou, and Hangzhou.

Even as the most promising private firms increasingly call the two Deltas home, these regions have not attracted as many people as they should. Only half of the 10 cities with the highest working-age population inflows are in the two Deltas. In other words, the Deltas can and should accommodate a lot more people.

These dynamics will likely determine population flows over the next decade, particularly in terms of urban-to-urban talent migration. Urbanization over the last couple decades has mainly taken the form of rural migrants moving from the farm into their provincial capitals, typically the largest city in a province and the easiest to obtain an urban hukou.

But that era is coming to a close, as migrants are going to vote with their feet and move from provincial capitals to the superstar coastal cities. That’s because provincial capitals on the whole have not been adept at attracting the most dynamic firms—21 out of the 27 provincial capitals (78%) are below the national average when it comes to the growth of A-share listed firms. That implies these capitals are not creating sufficient high quality, high wage jobs for young talent to stay.

Regional Disparity Takes a Backseat

Given this economic reality, Beijing will likely have to retool its regional development strategy. For the last couple of decades, the Chinese government has launched ambitious initiatives such as “revive the northeast” or “develop the west.” But the record of those schemes has not been stellar, as companies continue to flock to the Deltas and population continues to move east.

Meanwhile, Beijing confronts a more volatile external environment and hopes to double down on domestic consumption, which requires income growth. Short of handing people cash, one tried and true way to raise income is to allow more people to live in high-productivity regions, as well as investing more in those regions that will generate better returns.

But that requires a trade-off: the agenda of remedying regional disparity will have to take a backseat. That has long been a difficult proposition for the Chinese government, as it has deliberately made it harder for migrants to settle down in superstar cities, including capping their population.

It turns out that forcing development in central China and the hinterlands has been an inefficient and wasteful strategy that has also led to a massive debt problem. With financial sustainability and consumption rising to the fore, the central government has started to reckon with the reality that it has little choice but to rely more on the YRD and PRD regions for demand.

That will require a rethink on limiting population flows to those regions. And the 14th Five-Year Plan has already hinted that the two Deltas are encouraged to expand and are prioritized in national infrastructure investments.

A regional development strategy that emphasizes efficiency and consumption is a marked departure from Beijing’s longstanding focus on regional equality. It also further reinforces that when it comes to “common prosperity,” the prosperity part is more important than the common part.

No wonder that the common prosperity pilot province is Zhejiang, a coastal juggernaut that’s home to several superstar cities.