Rural Expansion and the Control of Urbanization

The process of economic development usually begins in the capital city, or most built up areas.  As we have seen with China over the last decade, rapid expansion occurred within its major cities prompting a necessity for huge investment in infrastructure and housing.

This pathway to becoming a developed economic country is a tricky one as acceleration within urban areas can cause the economy to collapse onto itself if this occurs too quickly.

China, over the past decade has had double digit growth as a cheap workforce stormed this huge nation into a competitive superiority over other developed countries.  As with all things, this cannot go on forever.  Industry and construction fuelled demand on a global scale for raw materials and machinery boosting company profits around the world.  Infrastructure spending in China was vast, Bejing’s underground railway had only two lines up until the start of the century, today there are 15 lines spanning  300 miles, with just under 8 million people using it daily and further expansion planned.  As with the underground system, housing has expanded at a similar pace.  With urban areas reaching capacity, there are a number concerns around the state of the economy in China.  The property market has seen rapid price increases and the government has warned it may increase taxes on second homes in order to curb further inflows into the property market.

The problem arises from rapid expansion in the urban areas, with little development outside.  This results in a greater demand for the built up areas causing a further divide.   This process is unsustainable and will eventually lead to asset bubbles and subsequent crashes.  A tempered approach is needed to structurally grow the rural areas as well.   In China this is starting to occur, but savvy infrastructure spending is a necessity.  

China has a long way to go in developing its vast nation further, but with wage increases and growth slowing, a number of hurdles are still to come.  The property and banking sectors are in my opinion the areas of major concern.  Such a rapid demand for new homes and mortgages begs the question, can these people repay their debt?  If this is not controlled, it may lead to a banking crisis similar to what we saw in 2008.

Enough about China… Another major economic player is Latin America.  Brazil especially has seen similar rises in its urban areas (maybe not at such an extreme pace).  With a majority of the wealth within its major cities, there will come a point where more rural areas begin to follow suit.

Wage inflation has started to occur and demand for more mature food stuffs are on the up.  There is much development still needed. The amenities available in rural areas are slim, and this follows through into demand for temporary measures such as generators.  Companies benefiting from this specifically are Aggreko, the largest generator maker globally.  Also, JCB announced strong demand for their vehicles(diggers) as construction ahead of the Rio Olympics is well under way.  After some good results recently, it is inherent demand in emerging markets is on the up and up. 

Emerging market investment funds will be your best bet to capture some of this upside.  First State Global Emerging Market Leaders would be my choice, however with such a pull on infrastructure spending still such a necessity, First States Global Listed Infrastructure fund is prime for growth.

These rapidly expanding countries have the size and ability to become some of the leading economies in the world, however it will not be a smooth ride and the management of growth throughout the whole country is needed.