China 's Urbanization Process Drives Investment And Consumption

Urbanization not only causes the population gathering in urban areas, but alsoinfluence the economy and society in all aspects. Since the lasting impact of theinternational financial crisis has weakened the impetus of foreign demand to China’seconomy, urbanization has become the greatest potential for China to expanddomestic demand and a powerful engine of the future economic growth. First, thispaper analyzes the mechanism of how urbanization can expand domestic demand intwo aspects, which are expanding investment demand and expanding consumptiondemand, so that to study how urbanization stimulating investment and consumption.Then, the theory of panel data model is introduced. On this basis, panel data from2000to2012of China’s29provinces is used in the empirical analysis, excluding theinfluence of population size and price factors, and chooses the semi-logarithmicmodel which has better economic implications. To study the boost of urbanization toinvestment, a panel cointegration model with variable coefficients and fixed effects isestablished, through panel data unit root test, cointegration test and modelspecification test, and results of provincial urbanization elasticities of investment areobtained using cross-section weighted generalized least squares (GLS) estimation.And two indicators are given as reference to measure the national average level,which is for each percentage point increase in urbanization can stimulate investmentgrowth of13%to15%. Using provincial elasticities, the provincial contribution ratesof urbanization to investment are calculated, and their ranking is analyzed. After that,the panel error correction model is established to examine the causality betweenurbanization rate and investment. The results show that there is no short-termcausality from urbanization to investment, but the long-term causality exists, and bothshort-term and long-term causality from investment to urbanization exist. To study theboost of urbanization to consumption, three panel cointegration models is established,after finding cointegration relationship between urbanization rate, annual per capitaconsumption and average annual income by panel data unit root test and cointegrationtest. The first model is a three-variable model commonly used in previous literaturethat uses both income and urbanization rate to explain consumption. The estimationfinds that this model ignores the enormous effect of urbanization on income, andseriously underestimated the stimulation of urbanization on consumption, thus it doesnot apply. The second model is a two-variable model that uses urbanization rate toexplain consumption, set as variable coefficients model with fixed effects. By GLS estimation, results of provincial urbanization elasticities of consumption and itsranking are obtained. And two indicators are given as reference to measure thenational average level, which is7%to9%. Using provincial elasticities, the provincialcontribution rates of urbanization to consumption are calculated, and their ranking isanalyzed. The third model is a two-variable model that uses urbanization rate toexplain income. The estimation has similar results, which further confirmed thesignificant influence of urbanization on income, and also reflects the robustness of themodel. After that, the panel error correction model is established to examine thecausality between urbanization rate and consumption. The results show that long-termbi-directional causality exists, which can promote mutual growth, while in the shortterm there is no causal relationship. Finally, based on the findings, some policyrecommendations are made, that the government should vigorously promote newurbanization construction, balance development between regions, and makeurbanization a long-term strategy for economic development, so that urbanization canplay a better role of expanding domestic demand in order to stimulating economicgrowth.