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Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

China is at an urban crossroads. Almost 53 per cent of its population lived in cities and towns at the end of 2012. In another two decades, China will probably be nearing the 80-per-cent urbanization level common in the West – suggesting some 1.1 billion city dwellers. Premier designate Li Keqiang wants urbanization to put people first. The question is: Where in China will he put them?

The Middle Kingdom could urbanize in three ways. One is to let people go where they like, and build accordingly. That would mean doing away with the hukou system that ties people's benefits to their home towns. Rural dwellers would probably flood to cities like Beijing, Shanghai and Guangzhou. Urban elites wouldn't like it, which could be a deal breaker: Beijing's subway carried a record nine million passengers on March 3. But that problem could be solved with continued investment.

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Then there's the resource-led route. China's southern regions get more than twice as much rainfall as the north on average. Beijing relies on rapidly depleting underground sources for around 75 per cent of its household water. Channelling urban flows southwards would make urbanization more sustainable. It would also help keep China's investment rate, which is roughly half of GDP, high for a few more years. But it would involve less capital flowing to China's hinterland, which accounted for just under half of total fixed asset investment in 2012.

The third way is to send rural dwellers where the buildings are. China's smaller cities face a surfeit of speculative property, and an inflow of people would liven up unwanted projects from Harbin to Hefei. Several academics have suggested loosening the hukou just enough to let people move to their nearest urban centre. That would reduce the scope for future investment and could minimize losses on construction projects for which there would otherwise be little natural demand.

If China is serious about putting people first, the demand-led model is the fairest. For sustainability, resources should guide development. But it's the last, supply-driven option that's most likely to help bury the effects of three years of wasteful investment. That makes it the most likely path.

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