Preparing for China's Urban Billion

Stefano Negri, McKinsey Global Institute

RIC, 4th annual conference New DelhiNovember 21, 2008

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McKinsey developed an innovative, unique perspective on the booming urbanization in China

Shanghai

Taizhou, Zhejiang

Beijing

Cangnan, Zhejiang

Huhehaote,Inner Mongolia

Shenzhen, Guangdong

Harbin,Heilongjiang

Taiyuan,Shanxi

Nanchong,Sichuan

Changsha,Hunan

Chengdu,Sichuan

Xiamen,Fujian

Suzhou,Anhui

Xingping,Shaanxi

Methodology

• Econometric model (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

Sources of distinctiveness

• Granularity – Yearly historical and forecast data at national and city level

• Comparability – Urban definition consistent with international standard and applied to all indicators

• Completeness – Time series data consistent with theory and individual city behavior, providing data and forecasts for 858 cities, including 195 "unofficial cities"

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Chinese cities are redefining urbanization scale, over the next 20 years …

Source: Demographia; China-All-City model output, McKinsey Global Institute analysis

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

By 2025, two-thirds of China’s citizens will live in cities …

… that’s nearly 1 billion people

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

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China's urbanization could follow different paths

Source: McKinsey Global Institute analysis

Super cities Hub and spoke Distributed Growth Townization

• A small number of very large cities emerge (>20 million), 4 of them reaching 30 - 40 million people each

• 11 economic clusters of large cities of 30 - 90 million people each emerge

• Major and very small cities decelerate, and a large number of cities from1.5 million - 5 million emerge

• Many small cities (500,000 - 1.5 million) emerge, including almost 300 rural counties becoming cities

Country examples

Japan Korea US Germany

Concentrated urbanization Dispersed urbanization

• Shanghai• Beijing

• Yangtzi River Delta cities

• Taizhou• Harbin

• Xingping

Examples of “boosted cities” in each scenario

Scenarios

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China's energy demand will more than double in all scenarios by 2025

Source: McKinsey Global Institute analysis

5,2332005

1,920Super cities

2,082Hub and spoke

2,258Distributed growth

2,140Townization

12

68

68

60

54

60

139

131

142

123

+138%+138%

Urban energy intensityBTU per Renminbi

Urban GDPRenminbi trillion

Urban energy demandQBTUs

6

Mass transit requirements could vary widely depending on urban shape

*Based on Chinese Government criteria, population and GDP in 2020Source: Urban Statistical Yearbook of China; Criteria of subway/light rail development issued by Ministry of Construction

Criteria*

Subway

• City population: ≥ 3 million

• City GDP: ≥ RMB 100 billion

Light rail

• City population: ≥ 1.5 million

• City GDP: ≥ RMB 60 billion

171Distributed

growth

131Trend Line

130Hub & Spoke

102Super cities

85Townization

Qualified cities by 2025

• 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

7

China will build a Chicago every year

*Smoothed to 5-year intervalsSource: NBS; press clippings; team analysis, city visits

POTENTIAL ANNUAL CONSTRUCTION OF LARGE SKYSCRAPERS*Number of buildings above 30 floors, 2005 - 2025

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2005 2010 2015 2020 2025

Hub and Spoke

Distributed growthTrend line

Super cities

Townization

Number of Skyscrapers in Chicago

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Contact information

http://www.mckinsey.com/mgi/

For more information and to download the full report

Stefano Negri, McKinsey Global InstituteStefano Negri, McKinsey Global Institute

McKinsey & Company

17/F Platinum - 233, Tai Cang Road

200020 Shanghai - PRC

Mobile: +86-15821665209

Email: stefano_negri@mckinsey.com

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BACKUPS

10

To tell the future, we had to understand the past

*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 validSource: McKinsey Global Institute analysis, China-All-City model output

70145

112

150021

51

254

1990

32

84

161

572

2005

Mega (10M+)

Big (5 - 10M)Mid-sized

(1.5 - 5.0M)Small (0.5 - 1.5M)Big town

(<0.5M)

2.02.0

9.59.5

8.08.0

5.05.0

N/AN/A5.65.6

9.39.3

17.417.4

15.815.8

13.613.6

14.514.5N/AN/A

Population Real GDP

CAGR, 1990-2005,percent

POPULATION BY CITY SIZEMillions of people

• 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

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The urbanization research produced a set of insights which are very relevant for businesses

Source: McKinsey Global Institute analysis

Urbanization is inevitable – and cities will be the clear drivers of China's economic growth

City clusters will provide a new lens to assess opportunities in China

Different urbanization paths could drive significantly different outcomes for China

Investment growth will continue, and public spending will

come along

Burgeoning middle and upper middle class will take off

China's "growing pains" will generate new markets and business opportunities

• 1 billion urban population• >90% GDP from urban areas

• 11 clusters are emerging, with average population of ~60 millions and ~60% of total urban investments

Variability between urbanization scenarios: • 20% in GDP• 15-30% of demand for natural resources

• 40+ trillion USD (2005 through 2025)• 170+ new MT systems, 360'000+ km of

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)

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China is moving toward an urban billion

Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis

POPULATION BY CITY SIZEMillions of people

TREND LINE FORECASTS

145 154

150233

84

104

120

316

926

2025

Mega cities (>10 million)Big cities (5 - 10 million)Midsized cities (1.5 - 5 million)

32

161

572

2005

Small cities (0.5 - 1.5 million)

Big towns (<0.5 million)

6.96.9

1.11.1

3.43.4

2.22.2

0.30.3

2.42.4

• Mega and midsized city populations will grow faster over the next 20 years

• An urban billion will be attained by 2030

CAGR, percentXXXX

13

Chengdu

Chongqing

ShanghaiWuhan

Guangzhou

Shenzhen

Beijing

Tianjin

Six new megacities will emerge by 2025

Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis

Millions of peopleTREND LINE FORECASTS

20252007

8.2

6.4

7.9

8.6

8.3

8.7

14.726.8

Beijing

17.125.1

Shanghai

12.6Tianjin

12.4Shenzhen

11.9Wuhan

10.7Chongqing

10.3Chengdu

10.1Guangzhou

Beijing and Shanghai already

megacities in 2007

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Even with conservative assumptions, urban GDP will more than quadruple by 2025

Source: McKinsey Global Institute analysis, China-All-City model output

SENSITIVITIES

68

2025 Low

2025 High

122005

54

+467%+467%

+350%+350%

Urban GDPRMB trillions

Urban GDP/capitaRMB thousand

Urban GDP/total GDPPercent

62

76

21

+195%+195%

+262%+262%

7575

9090

9292

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Clusters of cities with average population of ~60mln provide a new lens to assess market opportunities

Source: McKinsey Global Institute analysis

HubsECONOMIC REGIONS

`

Beijing

Xun River

Huang River

Yangtze River

Guangzhou

Qingdao

Chengdu

Dalian

Xian

Fuzhou

Shanghai

Wuhan

Tianjin

Xiamen

Jinan

Zhengzhou

Changsha

Shenzhen

Chongqing

Shenyang

Number of cities in the regionRegional hubs

Beijing / Tianjin 28

Shenyang / Dalian

22

Qingdao / Jinan 35

Zhengzhou 23

Xian 8

Shanghai 58

Chengdu / Chongqing

31

Wuhan 27

Changsha 20

Xiamen / Fuzhou

14

Guangzhou / Shenzhen

23

Fixed asset investment in 11 economic regions will represent almost 60% (13 trn RMB) of total urban investment in China by 2025

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Each scenario has pressures – But these appear less intense overall in concentrated urbanization

Source: City visits; interviews; McKinsey Global Institute analysis

Super cities

Hub and spoke

Distributed Growth Townization

Jobs and skills

Pollution

Energy

Water

Funding

Land development

Congestion

Pressure points

Concentrated urbanizationALL URBAN CHINA

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At local level, regardless of scenarios, it is possible to define an "urban productivity agenda" for Chinese cities

Source: McKinsey Global Institute analysis

NOT EXHAUSTIVE

Examples of detailed initiatives

• Create strategic land development plans (combining zoning, building heights, transit plans)

• Develop integrated, mixed use areas• Implement car traffic demand management

• Incentivize energy and water efficient industrial equipment

• Establish and enforce energy saving building codes• Increase control, emission standards on pollutants

• Introduce productivity based performance systems on public service provision (e.g., healthcare)

• Increase transparency in city budgets and infrastructure spending

• Partner with local companies to increase 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

Manage demand, not only supply of resources

Improve quality and relevance of educational process

Increase productivity in public services and capital expenditures

Build dense cities with integrated urban planning design

High-level initiatives

Land

Resources

Economics

People

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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