THE past 10 years were a golden decade for China. Millions were lifted out of poverty, and per-capita gross domestic product rose almost fourfold.

But China is at the crossroads now. Traditional engines of growth - investments and exports - have lost their magic due to inefficient spending and subdued global demand. Consumption is touted as the next growth driver, but concrete steps on how to boost it are lacking.

To arrest a decline in growth, there is an imminent need to reinvigorate urbanization, which is bound to be the next engine of future economic expansion.

China's urbanization exercise is by far the largest in Asia's history. Between now and 2020, some 14 million migrants will pour into cities from rural areas every year. China aims to raise the current urbanization rate of 51.5 percent to 60 percent by 2020.

Beyond the quantitative target, the aim of urbanization is to ensure sustainable GDP growth, put less stress on the environment and meet qualitative targets such as improving social inclusion. How to meet these objectives simultaneously takes the challenge to a whole different level.

One of the challenges to urbanization is demography.

China's urbanization drive is happening at a time when its population is aging. China's old age dependency ratio is one of the highest among developing Asian countries. An aging population makes it more difficult for urbanization to translate into productivity gains and increased consumption. Even if China is able to raise the urbanization rate to 60 percent by 2020, the positive impact on medium-term GDP growth and longer-term economic sustainability will be damped by an aging population.

The second demographic issue concerns the "Lewis Turning Point" - the decline in surplus rural labor that would move to work in cities. Encouraging more people to move into urban areas may strain urban resources and thin out rural-farm production. Hopefully, urbanization does not come at the expense of sustainable rural development.

Urbanization models

Despite these challenges, urbanization can proceed with careful planning and coordination. In particular, China needs to decide at the outset what sort of urbanization it wants to achieve.

In the simplest sense, urbanization can either be dispersed or concentrated. Under a dispersed form, there will be many small- and medium-sized cities all over China. These cities will plan their own transport systems, create their own jobs and set their own economic targets.

Under a concentrated form of urbanization, there will be megacities with populations of over 20 billion (The current permanent resident population of greater-Shanghai is about 23.5 billion). Clusters of small cities may surround large cities, forming regions with concentrated populations, integrated transport systems and joint economic targets. The Pearl River Delta is a good example of this.

The key benefit of concentrated urbanization is that it is consistent with the broader goal of increasing efficiency and productivity. Building one highway grid is probably more economical than building 10,000 small roads in villages all over China.

Concentration also facilitates economies of scale and results in less cannibalization of resources than under dispersed urbanization.

Once the model of urbanization is confirmed, the government would identify and expand target cities. Likely candidates include existing Tier-2 and Tier-3 cities with potential to incubate competitive industries, such as Changsha in Hunan Province and Wuhan in Hubei Province.

The ultimate aim is to increase productivity and competitiveness of these cities over time.

Possible criteria for picking these cities include: (1) property price levels that are not prohibitive to migrants; (2) a rising share of industrial production as a share of the city's GDP or total exports; (3) clear competitive advantages and themes to attract skilled labor, such as financial or technological hubs; and (4) no serious environmental degradation or traffic congestion.

Cities and towns adjacent to target cities can be developed with the aim of building city clusters and conurbations. We are encouraged by the fact that the 12th Five-Year Plan has already suggested targeted "city circles" as part of China's urbanization strategy.

New cities

Beyond existing candidate cities, the government may experiment with building new cities to attract talented people. Shenzhen in Guangdong Province has seen unprecedented population growth from a fishing village of 30,000 in the 1970s to a city of over 10 million people today. This growth was due, in part, to the development of cluster cities and supporting transport infrastructure, as well as its promotion as a Special Economic Zone.

Urbanization is more about boosting medium- to long-run productivity rather than short-term fixed asset investment. While the sheer size of this exercise will oil the investment engine, investment under the urbanization drive would look a lot different from the surge that occurred in 2008 and 2009.

At the most basic level, urbanization will stimulate demand for housing and amenities like water and electricity supply infrastructure. This may be called "responsive investment" as it is derived from the urbanization process.

A more important type of investment is "proactive investment." This type is aimed at running cities efficiently and boosting productivity.

China recently selected 90 cities and counties to participate in the nation's "smart cities" project, involving a total investment of about US$80 billion over the coming three to five years.

The investment will help these cities to deploy advanced information and communication technologies to provide public services and promote environment-friendly development. Despite the currently high investment to GDP ratio, proactive investment in the urbanization context is imperative to economic viability.

Urbanization is more than just a mass migration exercise. It is a strategy for pursuing growth in an efficient, cost effective and sustainable manner. Selecting and growing cities with clear competitive advantages will be key to success or failure.

Chris Leung is a senior economist at DBS. The opinions expressed are his own.