By Wilson Lau

From left: Sean Chiao of AECOM, Lincoln Leong of MTR Corp, Ben Way of Macquarie Group Asia, Yan Xuan of Nielsen, and Andrew Weir of KPMG

Urbanization is a key policy in Mainland China, and because of China’s large population and scarcity of land and water, megacities – and cities conglomerate into mega regions – are a form of sustainable development envisioned to create hubs for commerce, culture and education, representing a significant departure from the manufacturing model in place since the 1980s to advance the Chinese economy.

Identified by China’s National Development and Reform Commission, ten mega regions in the country will cover around 20 percent of China’s total area, include half of the national population, and account for 52 percent of the national GDP. The mega regions taking shape, including the Bohai Economic Rim in the north, Yangtze River Delta in central China, and Pearl River Delta in the south, are expected to be the economic engines driving the country.

The Pearl River Delta, according to a World Bank report, has already overtaken Tokyo to become the world’s largest urban area in both size and population. This megacity – covering a significant part of Mainland’s manufacturing heartland – forms a mega region where Hong Kong and Macau are included with the high-speed rail linking Hong Kong and Guangzhou as well as the Hong Kong-Zhuhai-Macau Bridge.

The development of megacities in China is here to stay, and the parameters of megacities and mega regions go beyond just physical construction but also include human and social links, notes Andrew Weir, Global Chairman of Real Estate and Construction, Regional Senior Partner (Hong Kong) and Head of Capital Markets at KPMG China.

“Southern China is one potential megalopolis,” he says. “The more often the community in Hong Kong articulates the central benefit of integration with southern China, the more we lobby, communicate and share strategies and seek collaboration across the border, the better the chance for the development of a mega region.”

A holistic approach

The World Bank has indicated that by 2030, 70 percent of China’s population will be in cities. The challenge is to make megacities sustainable and resilient, believes Sean Chiao, President for Asia Pacific at AECOM. “The connectivity needs further improvement, and it means more than roads and bridges. We will continue to advance Hong Kong as the hub for Pearl River Delta.”

“Connectivity also encompasses telecommunication and ecosystem linkage, and we need to look at ways to develop mega regions into a healthier place to live,” he says. “Quality of life is vital. This requires better healthcare and recreational facilities. We also need to focus on ways to make dense living environment more sustainable, and address problems of air and water quality, waste treatment and potential threats such as terrorism, and natural disasters.”

Public transport is an essential component in the infrastructure that drives the growth of cities. Lincoln Leong, CEO of MTR Corporation, says his company is active in many mainland cities, including the capital. Beijing now has over 600 kilometers of metro lines which will reach 1,000 kilometers by 2020. “We started with one line in Beijing. There are now four. This is a trend across China.”

Another trend in China, Leong notes, is the value capture through MTR’s rail and properties business model, which the company pioneered in Hong Kong in the 1980s. In Shenzhen, MTR owns properties above the train depot, and it has property development above a metro station in Tianjin. “Our strategy is to grow together with the cities. We also look at city clusters selectively. We expand our product delivery in some cities and expand into locations adjacent to the cities we operate.”

The rise of Chinese cities presents a huge opportunity: apart from well-built infrastructure and continuously improving environment, sustainability hinges on a healthy flow of capital both domestically and from abroad. Ben Way, CEO of Macquarie Group Asia, likens China’s development of megacities to the rapid urbanization of the 1920s in the US. The process of urbanization brings along the rise of entrepreneurship and innovation that will require capital to match the scale of growth.

“The next ten years will be exciting,” Way says. “We facilitate urbanization and identify the deficit of infrastructure and capital. We look for ways to bridge the gaps, and have scanned China by province, city and sector. For instance, there was a massive deficit of water infrastructure because it failed to keep up with the rapid urbanization, and the government wanted to rectify it. It needed capital.”

One of the biggest challenges is the allocation of credit in an economic system where the government accounts for 75 percent of debts but only 25 percent of the overall economy, he adds. “We need to address the access to credits and capital within different groups to enable cities to grow quicker.”

The human side

In China, around 600 million people currently live in cities and towns, and another 200 million will be urbanized in the next 20 years. This is all by design: it is a government policy, Yan Xuan, President for Greater China, Nielsen, points out. “By our forecast, 75 percent of urban households will become middle-class by 2025. There is huge demand for consumer goods, but not all branded consumer goods are accessible. It is an opportunity, but producers of consumer goods need to develop ways to reach consumers amid the urbanization.”

“Our data shows that over 150 products are called ‘cola’ in China but Coca-Cola and Pepsi are not included,” he says. “It tells us that a majority of consumers in China do not have access to branded goods. While e-commerce is going over the roof in the country, brick-and-mortar shops are still important. In 2015, over 10,000 shops of convenient store chains were opened, registering an 11-percent growth.”

Property developers should think of building destinations for families and creating “experiences” to draw crowds into malls because e-commerce is serving a growing chunk of the market, Yan suggests. In addition, “premium” is a growing trend among the rising urban middle class in China where personal income growth was around eight percent in 2015 and companies’ salary budget growth was between six and eight percent.

“Chinese consumers want finer things that domestic producers do not make. Mercedes Benz is a successful example of capturing China’s premium market, within a 13 percent increase in sales so far this year compared with the same period in 2015,” he highlights. “The average age of buyers in China is 36, compared with 56 in the US. And consumers in China do not need to leave the Internet platform to do many things, so companies need to participate in that.”

Urban redevelopment is another trend driven by the urban dwellers. “Many buildings built 15 years ago look horrible, and they are looking at ‘brown-field’ development, redeveloping what they have done before,” Chiao says. “China is looking at better quality, from lifestyle to environment, and long-term value for things in cities.”

As more Chinese return from their visit overseas, they want to see improvement where they live, Way believes. In tier-one cities, people push for better quality in schools, healthcare, jobs and living environment. In tier-3 or 4 cities, people may want different things, such as better connected roads and public transport. “When looking at the opportunities, companies need to identify the differences in different cities, even though they may be close to each other.”

Specialization of cities

In the conglomeration of cities into mega regions, complementary traits and differentiators of cities develop and flourish. For instance, in the Bohai Economic Rim of northern China, sustainable development has long been a key in Beijing and cities in Hebei Province. “There will be specialization in these cities,” Leong of MTR says.

“Beijing will be the political and cultural center; Tianjin will focus on manufacturing and shipping; and Hebei will be an environmental center and hub of low-tech manufacturing.” “The connectivity among these cities is vital,” he points out. “In the next decade, thousands of kilometers of railways will be built to connect the cities. This connectivity is also happening in the Pearl River Delta, including the high speed rail under construction.”

Here in Hong Kong, “we have the high-speed rail, the Hong Kong-Zhuhai-Macau Bridge, the airport’s third runway, the Shanghai-Hong Kong and soon Shenzhen-Hong Kong Stock Connect schemes,” Weir notes. “When all these add up, it is a compelling story about connectivity in the Pearl River Delta.”

And “we need to recognize that it will be a big place in the future,” says Chiao. “Cohesive collaboration requires leadership, a change of culture and mindset about how the places can work together. Cities need to identify their distinctness and uniqueness. Regional leaders need to reach across the region for overall coordination to boost competitiveness.”

“With different jurisdictions in different provinces, there is a need for coordination among cities,” he adds. “The development of mega regions needs cohesion.”