Productivity growth associated with higher economic concentration, increased specialization and efficient allocation of factors of production Growth will originate in cities Supply Side Y=f(H,K, L) Demand Side Y=C+I+G+NX Agglomerationknowledge sharing, labor matching and pooling (Human capital) Consumption and social amenities associated with density (Consumption) SpecializationEconomies of scale (TFP)External competiveness (Net Exports) Mobility and connectivity Free mobility of factors of production lead to higher economic returns Mobility requires public services and investments (G, I)

Emerging urban middle class will demand better services and lifestyles Higher urban incomes lead to higher consumption Urban middle class is willing to pay more for housing in high density areas that are associated with consumption amenities

Low and falling population densities have undermined agglomeration

Maturing industries are not moving to secondary cities fast enough The largest cities have are not sufficiently specialized in high value added services

Compared to other countries of similar levels of income, China’s urbanization is lower

Frictions in labor market mobility slow down income convergence Capital market distortions slow specialization Land market distortions result in falling densities