BEIJING | China keeps its developing plans going, and the country turns into a urban nation. A transformation that entails a dramatic achievement and a challenge without precedents in the world. Through a 6 trillion dollar investment, China aspires to urbanize 60% of the country. Building infrastructure such new subway lines, roads, highways and housing will help achieve this goal. As a result, within the next decade, 400 million people is expected to become urbanites. Consequently, the cities and its citizens will become the major engine of growth. Take the Chinese capital as an example. In 2010 the government of Beijing initiated a development plan aimed at improving the links of the city’s less developed Southern area. Happy with the results, in 2013 a new development plan is taking over to continue urbanizing the district.

Investment and more investment that will only flourish through clever and mindful planning. IMF’s country representative in China, Li Yiheng, threw a revealing message when he said China had overinvested in herself. According to the figures, the country invested a 50% of her GDP domestically, a 12% to 20% higher than the world’s average.

With this in mind, in a country that desperately needs a more balanced and sustainable growth, the right choice would be to invest in rational and well planned infrastructure projects. However, as cities become better places to live they become more expensive too, to the extent that people can’t afford the luxury of inhabiting these mega-cities. The issue gets even more pressuring because local governments lack appropriate budgets to invest in social services or affordable housing. Altogether, these expensive cities are creating  critical social and economic challenges.

Nowadays only half of the 700 millions urbanites enjoy official citizenship. For the 50% left, the archaic residence registry system, the so called hukou, permanently attaches them to their places of origin. On top of that, this unshakable system limits the access to education, employment and other social services to the “real” urbanites. Beijing is aware of that and it claims a commitment to the urgent and controversial hukou reform so that the 260 million migrant workers will enjoy a fairer residence status.

The figures released for the second quarter serve as a reminder of the economy’s weak recovery. Following an upward trend for 11 months, China’s PMI dropped for the first time in 2013 reaching a 50.6%, compared to March’s 50.9%. HSBC’s PMI services sub-index dropped for the first time since 2009 (51.1% vs 54.3% in March). According to HSBC, the decline was caused by a manufacturing slowdown and a fall of exports. In this context, Chinese cities emerge as the elixir of economy growth. Specially if indications urbanization plans might be starting to offer some positive results are taken into account. Migrant workers increasingly see emerging second and third tier cities as places with a higher quality of life and greater job opportunities.

A change of mind-set that is triggering a dramatic wave of returns. Now migrant workers look back to their hometowns in search of a better life, far away from the overcrowded and polluted first tier cities they once dreamed about.

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History tells us, indeed, that stock markets are extraordinary aggregators of most of the available information from inside and outside the economy. Since 1945, the S&P 500 index has forecast recessions some five months in advance by reflecting a ceiling-like point, in spite of official data not showing the downturn yet.

During the most recent cycle, the S&P 500 touched bottom in March, 2009, and the economy began its recovery in June. Right now, the markets are recording high levels but there isn’t a ceiling point at sight, meaning fears of an impending recession are exaggerated, so far. In fact, in many occasions in which a maximum level has been updated, markets keep rising during the following years–remember 1982-87 and 1989-2000, which led US consumers to believe wealth was increasing, too.

Another piece of information comes from how long the cycle takes. The US economy entered its current phase of expansion in June, 2009, 45 months ago–yes, a time also full of small ups and downs, and worries over new recessions, weak growth and very humble gains of 2.2% on average. The worst was avoided thanks to convenient doses of Quantitative Easing and Twist Operations (monetary injections) that have proved to be good moves. The US got a positive GDP in 2012 and has started the new year with better perspectives.

The question, of course, is how long it will take for the curve to head downwards. No expansion lasts for ever. So far, these 45 months look short comparing to what we observed in 1983 and 2007, that is periods of 100 months on average. But 45 months look just right when compared to what happened in 1945 and 1983, that is 50 months. It might be time for pause and reflection, then.

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BEIJING | In one of the countries with greatest inequalities in the world, opulence is set to be abolished. At least so wishes China’s leader in waiting, Xi Jinping. Now it’s time to give example. Therefore, even the 2.3 million soldiers of the world’s second biggest army, the People’s Liberation Army, received orders of not throwing leftovers away. Instead they must use them to cook other dishes such as “fried rice with egg, frying steamed rice buns or even turn vegetables into pickles or snacks”. Abundant state and official banquets will also be a thing of the past, as well as opulent and costly communist ceremonies. All this effort to send a clear cut propagandistic message aimed at triggering a dramatic change of the country’s values: let people embrace consumption while governmental institutions become more austere.

Bringing this new fairer society into being entails an overhaul of the current and corrupt system, which gives generous packages of benefits to circles of power and interests groups. The new leadership will have to deal with local governments and State Owned Enterprises ready to defend their current status quo and likely to be sceptical about any form of reform.

The outgoing Prime Minister, Wen Jiabao, gave his latest speech in front of the almost 3000 Communist Party delegates, during the first session of the annual National People’s Congress (NPC). He confessed Deng Xiaoping’s opening and reform process, started 30 years ago, had reached its toughest part. He used almost two hours of his speech to praise the achievements of the last 5 years. However, Wen surprised by a humble gesture devoting some time to acknowledge the weaknesses of the current system.

“Economic development is increasingly challenging in terms of resource preservation and environmental protection. The inequality gap is very wide. Social problems increased considerably affecting sectors such education, social security, health, housing and the environment. People still have a very tough life. The transformation of the government is not completed yet and there are many areas open to corruption”, Wen noted. He also revealed a GDP’s growth of 7.5% for 2013, and an inflation level of a 3.5%, while he also promised the creation of 9 million jobs.

While announcing these figures, the outgoing Prime Minister also mentioned the need to reform the financial sector while taking the improvement of the lives of the Chinese as the main priority. So that, if a sustainable growth were guaranteed there would be room for a transition toward a model driven by domestic consumption.

In this austere edition of the Congress, without welcome committees for the VIPs nor sumptuous decorations, Xi Jinping will be looking for support among his Party comrades. Beyond the need of reforms, avoiding a deepening factionalism within the Party is now top priority. Thus, as the leader of this historical transition, Xi needs to play two critical roles at the same time: being the Party’s idol and the People’s idol.

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“I could be wrong,” he added, “but that is my opinion. Why couldn’t we grow by a higher rate? Because people still are in the middle of a deleveraging process, which makes it near impossible that consumption takes off again. And because the financial system is still restructuring, and productivity growth has slowed down under the pressure of individual adjustments–now exhausted.”

According to Lockhart, whose speech tackled the challenges of growth and employment, “there is no silver bullet.” An efficient plan would be a mix of policies: “elimination of barriers like fiscal uncertainty, investing in growth policies like education and infrastructures, and a monetary policy that can generate favourable interest rates provided there’s no inflation threat.”

This could “speed up US growth and cut our official unemployment rate of 7.9%, a figure that excludes underoccupation–that is, people who work part-time and would like to move to full-time positions–or people who have left their jobs and don’t appear in the jobseeker lists.”

About the possibility that the Federal Reserve’s expansionary monetary policy cannot be stretched further, Lockhart admitted that “there is some truth in it, interest rates cannot be lower and yet, people stay away from borrowing. They are just busy trying to put their own house in order.” He sent a reassuring word to those who fear the Fed could spark new bubbles and future crisis, though. “There are no signs whatsoever that this is the case,” Lockhart said.

The Atlanta Fed’s president refused to comment on the price of the dollar–”it’s a matter for the markets”–, but was adamant to say that “a strong eurozone is beneficial for us, too.”

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China took Davos’ Economic Forum as an opportunity to tell the world not to panic about the prospects of Chinese economy. The Head of the National Economic Research Institute took the lead when saying that “the soft landing finally happened last year and now the economy is improving”. But with this statement he somehow missed a point that should worry China the most: what will happen to the economy in the long term. China’s economic miracle was possible thanks to three decades of cheap manufacturing and exports. Thousands of workers left their villages to become the cheap labour force of China’s southern cities. Now this is a thing of the past. Factories are experiencing a labour shortage that is causing an increase in wages and consequently a loss of the country’s competitive edge.

The reason why this is happening is that the country is about to reach the Lewis Turning Point, as the work of two  IMF’s economists, Mitali Das and Papa N’Diaye, warned. This mathematical model of development marks the point where a country’s rural population cease to be a source of cheap labour force for the manufacturing sector. When this happens, the industrial sector suffers an increase in wages, resulting in a loss of competitiveness and, therefore, causing a massive slowdown. According to the two  IMF’s economists, China will reach the Lewis Turning Point any time between the years 2020 and 2025. Nowadays, a 47% of the population lives in rural areas, but these workers are seeing how the prospects of finding a job in their native villages within the agricultural or services sectors  is increasing dramatically. For them it doesn’t makes sense anymore  to emigrate to the coastal industrialised cities, if they can find similar wages at home.

In this context, the new trend will likely put an end to  the outsourcing of manufacturing. Apple, for instance, already started manufacturing its Imacs in the United States. Whereas General Electric moved from Canton to Kentucky a great part of their production. The main cause behind this insourcing is that China is seeing an annual increase of the manufacturing work force wages of a 20%.

Trying to be realistic, China’s leading exporting provinces reduced to a half their growth goals for this year. They were used to figures such a 10% but for 2013 they don’t expect to grow beyond the 5%, according to information released by main Chinese media agencies. Future will tell how these provinces will rethink their modus vivendi. Much needed economic reform might help in some fields. But if reforms were finally embraced, it would take many years before the give some fruits. Meanwhile, the global economy’s bad health will keep on jeopardizing the basis of the current Chinese model.

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