LOCF | Among upheavals in the global economy, where are megalopolises headed? | In Conversation with Economist Zhang Ming

Today’s guest: Professor Zhang Ming

  • Director of the International Investment Laboratory at the Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS);
  • Chief Researcher for CASS’s innovation programme, ‘Cross-Border Investment Strategy Research in an Era of Global Turmoil’;
  • Former KPMG auditor, private equity asset manager, and Chief Economist at Ping An Securities;
  • Research mainly focuses on international finance and China’s macroeconomics; some of his publications include Macro in China: Economic Growth, Cyclical Changes, and Asset Allocation, Through the Business Cycle: RMB Exchange Rate Reform and Currency Globalization, China’s Cross-Border Capital Flow: Scale Calculations, Driving Factors, and Management Strategies, Country-Risk Rating of Overseas Investment from China (2014-2020), and more.

Topic: Opportunities and Challenges in a New Era of Megalopolitan Development

Key points:

  • Metropolitan and megalopolitan development are embodiments of a trend towards future regional economic integration;
  • Among upheavals in the global economy, China still needs to rely on large-scale domestic circulation to encourage economic growth and accelerate megalopolitan development;
  • Market forces inevitably tend towards the development of megalopolises;
  • Hainan Free Trade Port (HFTP)’s development faces various challenges, and its relationship with the Guangdong-Hong Kong-Macao Greater Bay Area (GD-HK-MO GBA) needs to be handled well.

Background

As the number of cities grow and urban populations increase, new changes in cities’ spatial forms and structures are now taking place: the global rise of megalopolises has become a highly notable phenomenon in economic geography. Megalopolises, also known as ‘city clusters’, are large-scale spatial forms that organically combine metropolises, regional cities, and suburban areas, taking advantage of geographical closeness, well-connected infrastructure, and frequent socioeconomic interactions. The convenience of transportation and internet access has not made cities more dispersed, but has instead encouraged higher levels of condensation and spatial reorganization. Since China’s 11th Five-Year Plan outlined the guiding idea of ‘megalopolitan development as the dominant form of continued urbanisation’, economic activity and populations have continued to congregate around megalopolitan areas. China is working hard to seize the enormous opportunities presented by megalopolitan development.

Question 1: How should we view China’s policy guidance towards building ‘City Clusters’? How can megalopolises affect China’s macroeconomic development?

Zhang: The construction of metropolitan and megalopolitan areas is a critical step taken by this new era of Chinese government, aiming to accelerate both systematic improvement and structural reform of the socialist market economy (SME). On one hand, the ‘Guideline to accelerate improving socialist market economy in the new era’, issued by the General Offices of the Party Central Committee and of the State Council on May 18th, 2020, establishes goals such as ‘drafting a new mechanism for harmonised regional development; perfecting major regional strategies such as coordinated development in the Jing-Jin-Ji Metropolitan Region (JJJ), development of the Yangtze River Economic Belt, integration of the Yangtze River Delta, construction of the Guangdong-Hong Kong-Macao Greater Bay Area (GD-HK-MO GBA), ecological preservation in the Yellow River Watershed, etc.; encouraging implementation mechanisms for the formation of regional economic layouts with clearly identified main functions, complementary advantages, and high-quality development.’ In other words, I think that the construction of metropolitan and megalopolitan areas are all embodiments of a trend towards future regional economic integration. On the other hand, in the ‘Guideline on improving market-based allocation of production factors’, issued on April 9th, 2020, it is proposed that the market-based pricing and free movement of production factors such as land, labour, talent, finance, technology, and data should be amplified in the future. The result of market-based pricing and free movement for production factors is surely that they will flow towards certain areas with great future development potentials, large demand, and high rates of return on investments. This also means that regional integration in the future will be accelerated.

At the moment, both the global economy and the Chinese economy face upheavals that we haven’t seen in a century. As globalization halts (and even regresses), rise of isolationism and protectionism, growing frictions between China and America in economic and trade issues, the external challenges faced by the Chinese economic growth project is unprecedented. Under these circumstances, Chinese leaders have proposed a new development pattern that gradually repositions domestic circulation at its centre, as well as encouraging the interconnection of domestic and international economic circulation. In order to rely on domestic circulation to encourage Chinese economic growth, the Chinese government must further break down obstacles preventing production factors from flowing freely in the country, thereby constructing a unified domestic market. This means that a new round of economic integration, symbiotically connected to the development of metropolitan and megalopolitan areas, will accelerate across the board. Domestic consumption and investment will contribute to Chinese economic growth at a much larger scale. To put simply, the development of metropolitan and megalopolitan areas is an obvious and inevitable choice for further unearthing the Chinese economy’s potential for endogenous growth.

Question 2: Globally speaking, highly developed megacities often exist within megalopolitan areas. Is the construction of megalopolises an inevitable trend for economic development?

Zhang: Indeed, looking at the experience of core developed countries globally, many megacities are within city clusters; examples include the northeast megalopolis (‘Bos-Wash Corridor’) in America, the Tokyo-Yokohama Metropolitan Area, the Seoul-Sejong city cluster, etc. In a big market, if resource pricing is determined by market supply and the free flow of resources can be guided by prices, then the aggregation of production factors will be a significant trend. If the government approaches factor aggregation with an attitude of encouragement and guidance, then regional integration will accelerate, and metropolises and megalopolises will form. But if the government approaches factor aggregation with an opposing or even hindering attitude, then regional integration may be interrupted and high-quality metropolitan or megalopolitan development may not occur. Such a country’s regional development may be more balanced, but it will very likely be a kind of low-level equilibrium that goes against market trends.

Question 3: The development of megalopolises is intimately connected with digitization and economic globalization. Might events such as anti-globalization trends after the 2008 financial crisis and the current pandemic seriously threaten megalopolitan development?

Zhang: After 2008, there was definitely an anti-globalization phenomenon in areas such as trade, and this phenomenon may grow more significant after the Covid-19 outbreak. For example, global production chains in the future may become shorter and more regional. This naturally will affect the cross-national flow of production factors, thereby negatively influencing the global development of megalopolises. However, on the other hand, the slowing-down of globalization may cause regionalization to accelerate. As such, regional aggregation of factors of production will also encourage the growth of city clusters. Similar to my answer to the first question, in response to possible negative impacts of anti-globalization, China will increasingly rely on a big, unified domestic market to drive growth in the future, which means that market-based pricing and free flow for factors of production in China must hasten; this will help accelerate regional integration, megalopolitan development, and urbanisation.

Question 4: Could you talk about the Hainan Free Trade Port in more detail? What kinds of accelerating impacts can this policy have on megalopolitan development?

Zhang: Right now China already has more than 10 provincial free-trade zones, but the Hainan Free Trade Port (HFTP) is the first free-trade port. Compared to provincial free-trade zones that operate ‘within borders and customs’, the HFTP’s ‘within borders, outside customs’ strategy has a higher degree of openness. As such, if the HFTP can be successfully launched and quickly developed, it will be enormously important for Hainan Province, the South China Region, and even the entire Chinese economy. However, the devil’s in the details. Historically Hainan has experienced many opportunities for significant development, but none of them were able to proceed due to the rise and fall of speculation and arbitrage.

If the HFTP is to achieve fast, sustained growth, it has to at least do the following 4 things well:

  • First, in its future construction process, the HFTP should work to avoid becoming a space for speculation and arbitrage again;
  • Second, Hainan should synthesize its own resource endowments with policy advantages to set concrete development goals for the future, and work to preemptively fix shortcomings that may hinder attainment of these goals;
  • Third, Hainan’s relationship with the Guangdong-Hong Kong-Macao Greater Bay Area (GD-HK-MO GBA) needs to be handled well, especially in terms of its own positioning;
  • Fourth, the implementation of rules and regulations, buildup of human capital, and relaxation of central control will be absolutely critical to the development of the HFTP.

The GD-HK-MO GBA is, without a doubt, already an important engine and source of innovation for China’s economic growth, and will play an even more important role in the future. Hainan and the GBA are only separated by the narrow Qiongzhou Strait, so if Hainan’s relationship with the GBA is handled well, it can make a critical difference for the HFTP’s differential and sustainable growth.

Here there are two schools of thought:

  • First, the HFTP’s construction could drive growth in the relatively underdeveloped western region of Guangdong and the eastern region of Guangxi. Guangdong’s western region and Guangxi’s eastern region are a natural connective pathway between Hainan and the Mainland, and to this day their standards of development are still falling behind the rest of the South. Therefore, within the HFTP’s construction process, it would be logical to simultaneously build up its economic connection with these two regions through infrastructure development, so that the Lingnan region (including Guangdong, Guangxi, Hainan provinces as well as Hong Kong and Macau SARs) can be better integrated and achieve high-quality, equitable growth;
  • Second, it would also be beneficial to further Hainan Province’s collaboration with Hong Kong and Macau. As the free-trade port with the highest degree of openness, Hainan in the future will be ‘within borders, but outside customs’; this presents an open policy advantage over cities such as Shenzhen and Guangzhou. This means that at least at the level of factor free flow, Hainan is more similar to Hong Kong and Macau. As such, in accelerating high-level, multi-area collaboration with the two SARs, Hainan’s unique advantage and competitiveness can be strengthened.

Summary

How will collaboration and cooperation among city clusters affect urban economic growth? How should we utilize policy measures to avoid cutthroat competition and increase the pace of urban integration? What are the connections between geopolitics and economic growth?

Answers to the above questions will be shared at our newly launched event in collaboration with LSE SU China Development Forum, LOCF 2020 — “Collaboration and Competiton: Joint Development and Opportunities in a New Era of City Clusters”. Our guests will dissect geopolitical impacts for the Chinese economy in-depth from a macroeconomic perspective, interpret current government policies regarding megalopolitan development and construction, explore policy implementation plans and obstacles, and discuss and analyze China’s contemporary real estate market.
We look forward to welcoming you on September 5-6, 2020, at the JW Marriott Marquis Hotel Shanghai Pudong.

To learn more about the upcoming LOCF conference, please like our Facebook page and check our social media regularly for more details.

Credits

Planning: Harry Liang, Yifan Zhao

Interview: Yifan Zhao

Copywriting: Yifan Zhao

Typesetting: Wenxin Tang

Translation: Irene Zhang

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