To promote quality urbanization, the Chinese government should consider building up the national labor and capital markets but not encourage local governments to compete with each other for investments by handing out favorable policies, says an editorial in the 21st Century Business Herald. Excerpt:

China's urbanization is largely following the path of most countries. The big cities are technology and capital centers in the early stage of industrialization. The production costs in big cities rise along with economic growth. After the production technology standardization is accomplished, the industrial production gradually spreads out into smaller cities and counties. Then the big cities become financial and business centers and start leading national economic development through innovations.

However, big cities in China do not have developed financial and business service industries because of the restrictions of some policies and rules. Big cities are competing with each other for foreign and government investments by offering investors favorable policies to boost the growth of manufacturing industries, which are important contributors to GDP growth and job markets. As a result, manufacturing industries do not spread to neighboring small cities and counties.

That's why big cities in the three largest city groups — Beijing-Tianjin, Shanghai-Hangzhou-Nanjing and Guangzhou-Shenzhen-Zhuhai — become larger and larger, attracting more people than what they can afford. Meanwhile, the midsize and small cities and counties are left underdeveloped.

If the Chinese government builds up a national labor and capital market and calls an end to big cities' low-level investment competition with each other, the resource factors will naturally flow to places with a higher production efficiency and rate of return on investment, which will benefit the development of the small and midsize cities and counties.

Big cities should pay more attention to developing services sectors and cultural industries. If they continue to hold the manufacturing industries for the sake of economic gains, they will actually be impeding the balanced urbanization in China.