Where Big Is Best

China's larger cities have clearly packed a more powerful economic punch than smaller urban centers. MGI estimates that in 2007 only 14 cities had populations of more than 5 million and yet they accounted for 33 percent of China's GDP. Large cities have also disproportionately attracted investment and skilled workers. One quarter of Shanghai's work force has college degrees.

Public spending overall would be somewhat lower as a share of GDP in concentrated urbanization than in dispersed growth. Energy usage would be 20 percent more efficient. The loss of arable land would be limited to some 7 to 8 percent compared with more than 20 percent in dispersed urbanization, where cities tend to expand "horizontally." Carbon emissions would be substantially lower as denser cities mitigate carbon output—and while pollution in individual cities might be higher, dealing with it is more practical on a large scale than if the problem is dispersed nationwide.

Beijing has many policy options if it were to decide to move in this direction. It could enforce even tighter restrictions on land acquisition by cities, slowing the growth of less-developed urban centers and favoring dense urban development in large cities; it could promote infrastructure projects including roads, refineries and ports centered on super-cities and city clusters, and it could grant more autonomy to larger cities, allowing them greater flexibility to set their own policies.

Outside observers may be skeptical about the prospect of many huge, densely packed Chinese cities. Will China spawn a new generation of cities tarnished by slums and social deprivation that we see elsewhere? Or can China manage its demographic phenomenon effectively and create a new generation of world-class modern cities to rival, say, New York or Tokyo?

The difference between the two will be effective management. Mayors will need to think more strategically and put urban productivity at the core of their thinking—focusing on the quality of urbanization rather than supporting GDP growth at any cost. Even if urbanization proceeds on its current course, China should meet its ambitious new target of quadrupling per capita GDP by 2020. But by putting urban productivity at the core of their thinking, China's urban developers will deliver much greater improvements in the quality of life of its citizens.

Some cities such as Wuhan, Qingdao and Hangzhou are already showing the way, pioneering innovative approaches to boosting the efficiency of public-service delivery, developing talent sometimes in conjunction with the private sector and experimenting with new antipollution and anticongestion measures. China needs to replicate their successes across the nation and do so urgently because the pressures of urbanization will hit the most vulnerable—migrants and small cities—the hardest.

How China manages its transformation will not only shape the nation but exert a powerful influence around the globe. As the world watches China's progress, there is little doubt that the sheer scale of change is impressive. But the ingenuity of city managers, their efficient use of resources and a strategic approach centered on concentrated growth and urban productivity will be the yardsticks of long-term success.

The summary of " Preparing For China ' s Urban Billion " is available for free download at mckinsey.com/mgi.

Farrell is director of the McKinsey Global Institute, where Janamitra Devan is a senior fellow. Jonathan Woetzel is a director in McKinsey & Co.’s Shanghai office.

© 2008