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China Urban Population Set to Explode — How to Play It?

Wednesday, 24 Oct 2012 | 5:49 AM ET

As China steers its economy away from a dependence on exports towards domestic consumption, its booming urban population will play a major role in driving growth in the world's second largest economy.

Gardel Bertrand | hemis.fr | Getty Images

China's urban population, which has already surpassed rural residents, is expected to expand by 300 million over the next two decades. At the end of last year China's urban population stood at 690.79 million compared with 656.56 million in the countryside, according to its National Bureau of Statistic.

"Urbanization will be critical to China's economy and to sustaining the next stage of growth. By redistributing resources including, labor, income and wealth among regions and households, urbanization can help optimize the balance between investment and consumption," Minggao Shen, head of China research at Citi, wrote in a report.

The bank forecasts this "urbanization dividend" could raise the country's potential growth rate by 0.8 percentage points to 8.5 percent in 2015 and by 1.6 percentage points to 7.1 percent in 2020, underpinning sustained growth of 6-8 percent in the coming decade.

"Urbanization is accompanied by the adoption of urban lifestyles and an improvement in living standards, entailing massive investment in infrastructure and housing and an upgrading of consumption tastes and preferences," Shen said.

Playing the Urban Boom

The consumption and services sectors will be the biggest beneficiary of the next wave of urbanization, according to Shen.

"Rising population and increase in disposable income would help discretionary spending, benefiting both department stores and brands," he said.

His top picks in the consumption space include Hong Kong-listed supermarket chains Sun Art and China Resources Enterprise, department store operator Intime and sportswear retailer Belle, given their capacity to expand and penetrate into newly developing cities, and strong distribution channels.

On the services front, he highlighted healthcare, transportation and financial services, as attractive investment destinations.

"Urbanization over the next decade will lead to stronger demand for retail banking and wealth management services," said Shen, pointing to brokerage CITIC Securities as his favored stock in the sector.

"CITIC is well positioned for urbanization given its coastal-area focused branch network…(and its) leading market position in an under-penetrated industry that is undergoing liberalization," he said.

By CNBC's Ansuya Harjani