RIC, 4th annual conference
New Delhi
November 21, 2008
Preparing for China's Urban Billion
Stefano Negri, McKinsey Global Institute
This report contains information that is confidential and proprietary to McKinsey & Company, Inc., and is solely for
the use of McKinsey & Company, Inc., personnel. No part of it may be used, circulated, quoted, or reproduced for
distribution outside McKinsey & Company, Inc. If you are not the intended recipient of this report, you are hereby
notified that the use, circulation, quoting, or reproducing of this report is strictly prohibited and may be unlawful.
McKinsey developed an innovative, unique perspective on the
booming urbanization in China
Methodology
Sources of distinctiveness
• Econometric model
• Granularity – Yearly
(22,000+ equations) –
macro and demographic
forecast 2007-2025
• Scenario analysis –
4 alternative scenarios
depicting contrasting
directions for China's future
urbanization, size
and pattern
• City visits – visited 14
different cities and
interviewed >100 local
government officials and
business leaders to
complement the
model findings
1
Harbin,
Heilongjiang
historical and forecast data
at national and city level
• Comparability – Urban
Xingping,
Shaanxi
definition consistent with
international standard and
applied to all indicators
Beijing
Huhehaote,
Inner Mongolia
Taiyuan,
Shanxi
• Completeness – Time
Suzhou,
Anhui
Nanchong,
Sichuan
Shanghai
Taizhou, Zhejiang
Chengdu,
Sichuan
Changsha,
Hunan
Cangnan, Zhejiang
Xiamen,
Fujian
Shenzhen, Guangdong
series data consistent with
theory and individual city
behavior, providing data
and forecasts for 858
cities, including 195
"unofficial cities"
Chinese cities are redefining urbanization scale,
over the next 20 years …
How many additional people will
live in Chinese cities vs today?
More than 350 million people, more than
the population of the entire United States
How many cities in China will
have more than one million
inhabitants?
More than 200 cities; in Europe today there
are only 35 cities of that size
How many new skyscrapers will
be built?
There will be up to 50,000 new
skyscrapers, the equivalent of building ten
New York cities
How many new mass transit
systems will be built?
Up to 170 new mass transit systems; in
Europe today there are about 70
By 2025, two-thirds of China’s
citizens will live in cities …
… that’s nearly 1 billion people
Source: Demographia; China-All-City model output, McKinsey Global Institute analysis
2
China's urbanization could follow different paths
Scenarios
Super cities
Hub and spoke
• A small number • 11 economic
of very large
cities emerge
(>20 million), 4
of them reaching
30 - 40 million
people each
Examples of
“boosted
cities” in each
scenario
• Shanghai
• Beijing
clusters of large
cities of 30 - 90
million people
each emerge
• Yangtzi River
Delta cities
Distributed
Growth
Townization
• Major and very
• Many small
small cities
decelerate, and
a large number
of cities from
1.5 million 5 million emerge
cities (500,000 1.5 million)
emerge,
including almost
300 rural
counties
becoming cities
• Taizhou
• Harbin
• Xingping
Country
examples
Japan
Korea
Concentrated urbanization
Source: McKinsey Global Institute analysis
3
US
Germany
Dispersed urbanization
China's energy demand will more than double in all
scenarios by 2025
Urban energy
intensity
BTU per Renminbi
2005
Super
cities
Hub and
spoke
Distributed
growth
Townization
5,233
Urban GDP
Renminbi trillion
12
60
1,920
2,140
131
68
2,082
2,258
Urban energy
demand
QBTUs
142
68
139
60
54
123
+138%
Source: McKinsey Global Institute analysis
4
Mass transit requirements could vary widely depending
on urban shape
Qualified
cities by 2025
Criteria*
Light rail
• City population:
≥ 1.5 million
• City GDP:
≥ RMB 60 billion
Subway
• City population:
Distributed
growth
171
Trend Line
131
Hub & Spoke
130
≥ 3 million
• City GDP:
Super cities
102
≥ RMB 100
billion
Townization
• In all Europe
(including Russia),
there are
approximately 70
subway and light
rail systems
• 150,000 to 400,000
additional rail cars
needed
• Between 4.5 and 7
trillion RMB over
the next 20 years
85
* Based on Chinese Government criteria, population and GDP in 2020
Source: Urban Statistical Yearbook of China; Criteria of subway/light rail development issued by Ministry of Construction
5
China will build a Chicago every year
POTENTIAL ANNUAL CONSTRUCTION OF LARGE SKYSCRAPERS*
Number of buildings above 30 floors, 2005 - 2025
5,000
Hub and Spoke
4,500
4,000
3,500
3,000
2,500
Super cities
Number of
Skyscrapers
in Chicago
2,000
Trend line
Distributed growth
Townization
1,500
1,000
500
0
2005
2010
* Smoothed to 5-year intervals
Source: NBS; press clippings; team analysis, city visits
6
2015
2020
2025
Contact information
For more information and to download the full report
http://www.mckinsey.com/mgi/
Stefano Negri, McKinsey Global Institute
McKinsey & Company
17/F Platinum - 233, Tai Cang Road
200020 Shanghai - PRC
Mobile: +86-15821665209
Email: stefano_negri@mckinsey.com
7
BACKUPS
8
To tell the future, we had to understand the past
POPULATION BY CITY SIZE
Millions of people
Populatio
n
Mega (10M+)
Big (5 - 10M)
Mid-sized
(1.5 - 5.0M)
Small (0.5 - 1.5M)
Big town
(<0.5M)
254
21 0
51
CAGR, 1990-2005,
percent
Real GDP
572
32
5.6
N/A
14.5
N/A
84
9.5
17.4
161
8.0
15.8
150
2.0
9.3
145
5.0
13.6
112
• We discovered that
there are various
ways to define
Chinese cities (e.g.
Chongqing)
• We corrected
statistical distortions
(e.g. hukou vs
census)
• We uncovered 195
“hidden cities”
• We established that
migration is only
half the story
70
1990
2005
* Include 663 official cities and 195 additional areas that we consider as cities using various government criteria to qualify them. These criteria were discontinued
in 1996 for practical reasons but, in our view, remain valid
Source: McKinsey Global Institute analysis, China-All-City model output
9
The urbanization research produced a set of insights which are
very relevant for businesses
Urbanization is inevitable – and
cities will be the clear drivers of
China's economic growth
• 1 billion urban population
• >90% GDP from urban areas
City clusters will provide a new
lens to assess opportunities
in China
• 11 clusters are emerging, with average
Different urbanization paths
could drive significantly different
outcomes for China
Variability between urbanization scenarios:
• 20% in GDP
• 15-30% of demand for natural resources
Investment growth will
continue, and public spending will
come along
• 40+ trillion USD (2005 through 2025)
• 170+ new MT systems, 360'000+ km of
Burgeoning middle and upper
middle class will take off
China's "growing pains" will
generate new markets and
business opportunities
Source:McKinsey Global Institute analysis
10
population of ~60 millions and ~60% of
total urban investments
new water pipe, x6 healthcare spending
• Middle class (household income 40k-200k
RMB/yr) will make up almost 80% of total
consumption
• Spending in key areas such as
environmental protection is bound to raise
(e.g., 100% SO2 scrubbers)
China is moving toward an urban billion
TREND LINE FORECASTS
POPULATION BY CITY SIZE
Millions of people
Mega cities
(>10 million)
Big cities
(5 - 10 million)
Midsized cities
(1.5 - 5 million)
572
32
84
XX
926
2.4
120
6.9
104
1.1
316
• Mega and
midsized city
populations will
grow faster over
the next 20 years
• An urban billion
161
233
2.2
0.3
Small cities
(0.5 - 1.5 million)
150
Big towns
(<0.5 million)
145
154
2005
2025
Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis
11
3.4
CAGR, percent
will be attained
by 2030
Six new megacities will emerge by 2025
TREND LINE FORECASTS
Millions of people
2007
14.7
Beijing
26.8
17.1
Shanghai
Tianjin
Shenzhen
Wuhan
Chongqing
Chengdu
Guangzhou
25.1
8.7
12.6
Beijing
8.3
Tianjin
12.4
8.6
11.9
7.9
10.7
Shanghai
Chengdu
Wuhan
Chongqing
6.4
10.3
8.2
10.1
Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis
12
Beijing and
Shanghai already
megacities
in 2007
Shenzhen
Guangzhou
2025
Even with conservative assumptions, urban GDP will
more than quadruple by 2025
SENSITIVITIES
Urban GDP
RMB trillions
2005
2025 Low
Urban GDP/
total GDP
Percent
75
12
54
90
Urban GDP/capita
RMB thousand
21
62
+350%
2025 High
68
+467%
Source: McKinsey Global Institute analysis, China-All-City model output
13
+195%
92
76
+262%
Clusters of cities with average population of ~60mln provide
a new lens to assess market opportunities
Hubs
ECONOMIC REGIONS
Regional hubs
Number of cities
in the region
Beijing / Tianjin
28
Shenyang /
Dalian
22
Qingdao / Jinan
35
Xian
14
Shenyang
Beijing
8
Zhengzhou
23
Shanghai
58
Chengdu /
Chongqing
31
Wuhan
27
20
Xiamen /
Fuzhou
14
Guangzhou /
Shenzhen
23
Dalian
Tianjin
Huang River
Qingdao
Xian
`
Yangtze
River
Changsha
Source: McKinsey Global Institute analysis
Fixed asset investment in
11 economic regions will
represent almost 60%
(13 trn RMB) of total urban
investment in China by 2025
Jinan
Zhengzhou
Shanghai
Wuhan
Chengdu
Chongqing
Changsha
Fuzhou
Guangzhou
Xun River
Xiamen
Shenzhen
Each scenario has pressures – But these appear
less intense overall in concentrated urbanization
Concentrated urbanization
Pressure
points
Super
cities
Land
development
Congestion
Jobs and
skills
Funding
Water
Energy
Pollution
Source: City visits; interviews; McKinsey Global Institute analysis
15
Hub and
spoke
Distributed
Growth
ALL URBAN CHINA
Townization
At local level, regardless of scenarios, it is possible to define
an "urban productivity agenda" for Chinese cities NOT EXHAUSTIVE
High-level initiatives
Examples of detailed initiatives
Land
• Create strategic land development plans
Resources
Economics
People
Build dense cities
with integrated
urban planning
design
Manage demand,
not only supply of
resources
• Incentivize energy and water efficient
industrial equipment
• Establish and enforce energy saving building codes
• Increase control, emission standards on pollutants
Increase
productivity in
public services and
capital expenditures
• Introduce productivity based performance systems
Improve quality
and relevance of
educational
process
• Partner with local companies to increase
Source: McKinsey Global Institute analysis
16
(combining zoning, building heights, transit plans)
• Develop integrated, mixed use areas
• Implement car traffic demand management
on public service provision (e.g., healthcare)
• Increase transparency in city budgets and
infrastructure spending
internship / team work (e.g., establishing joint
vocational education and training institutions)
• Introduce performance management systems on
labor productivity and employability measures
rather than, for example, enrollment rate
The China urbanization story
• China's urban success story will continue, with massive changes in the next 20 years
– China has set ambitious economic goals. Urbanization is key to make that happen –
urban GDP / capita will grow five times and cities will generate more than 90%
of China's GDP
– Urbanization will continue, but with it will be different from the urbanization
China experienced in the past 15 years (e.g., migration will be the driving force)
– Pressure will intensify on several areas and will need to be managed, especially if
China continues to follow a dispersed pattern of urbanization – land and spatial
development, resources and pollution, human capital, funding
• There is an opportunity to shape China's future towards a more productive
urbanization – with policy interventions both at national and local level
– Between all possible urban shapes, concentrated growth is the most efficient and
beneficial way to go for China (higher GDP, more efficient use of resources, more
productivity from its talent pool)
– "City level productivity initiatives" are an opportunity to reduce the cost of
urbanization while increasing quality of life (China could cut its public spending
needs by 2.5% of GDP, reduce SO2 and NOx emissions by upwards of 35%; halve
its water pollution; and deliver private sector savings equivalent to an additional 1.7%
of GDP in 2025) and opening new business opportunities
17