Photo by Flickr user "diametrik" under a Creative Commons License.
East Asia Forum has a good article outlining why urbanization, in and of itself, won't be enough to drive consumption growth in China. Here's the key takeaway:
Upward mobility through migration to the city is largely blocked by the hukou barrier. The notion that urbanisation is the path to prosperity is premised on most migrants’ being able to move up eventually. To follow that path, China will have to start treating rural migrants as equals in the city by granting them urban hukou, so they can enjoy the same rights and opportunities as natives.
Beijing has toyed with hukou reform for years, so a gradual phase-in seems likely. Urbanization, above all else, is the key to the survival of the Communist Party. Migration to cities provides a justification for China's investment-driven growth model by masking waste and inefficiency. For all of Premier Wen Jiabao's talk of re-balancing the economy, the investment-driven approach is in place because it suits the Party's political needs, not the other way around. China will no doubt continue this approach until it stops working, so tackling income inequality through hukou reform is thus a win-win for both the government and the newly urbanized poor.
In the long term, though, urbanization entails a potential threat to Party control. China's numerous "mass incidents" typically occur away from the spotlight in the country's countless small towns and villages, and are almost always in response to localized corruption. Urbanization will lead to the gradual consolidation of the Chinese population in increasingly larger towns and cities, leading the population of smart phone wielding, Weibo blogging, university educated Chinese to grow. While much of China's urban population is satisfied with the status quo, the increased connectivity of the population heightens the risk that a localized incident might spiral out of control. Don't think the Party leaders haven't thought about that.
