Editor's note: China Daily interviewed Chi Fulin, president of the China Institute for Reform and Development in Hainan province, on the challenges facing the country's urbanization.

Is urbanization a natural process or a government-led initiative?

Moving nearly 300 million people - equal to the total population of the United States - into cities by 2030 is an unprecedented challenge. China's approach, which it has used to tackle every problem it has encountered during reform and opening-up, is always to experiment first.

Cities are believed to be the engines of economic growth in a developing economy, as urbanization is likely to influence the efficiency of economic growth and income distribution. The two usual channels associated with positive economic contributions by urbanization are external scale economies and knowledge spillovers.

As disposable income has surged rapidly after more than three decades of reform, calls have intensified for a better life and equal rights. Urbanization is therefore critical to nationwide economic efficiency and sustained modernization and growth, and is an essential element of reducing the rural-urban wage and welfare gap in China.

What characterizes urbanization in the past decade and what adjustments are required?

Urbanization has played a key role in driving China's economic growth over the past decades. But the new urbanization drive should shift from the previous reckless expansion of urban areas toward efficient use of available land.

For instance, China's urban area growth was 1.71 times that of its urban population growth during the 1990s, and it climbed to 1.85 times in the first decade of the 21st century. In comparison, the internationally recommended ratio is 1.12.

China's arable land has also rapidly decreased and its per capita arable land is now half the global average. Meanwhile, the country's energy consumption per unit of gross domestic product is more than double the global average, and it is increasingly dependent on imports of mineral resources.

Future urbanization should also avoid a sharp decline in arable land resulting from the arbitrary use of land, and should expand forests, lakes and marsh areas.

What needs to be done to achieve the potential of urbanization?

Accelerated urbanization is crucial as it unlocks domestic consumption, which helps fuel economic development. According to estimates, if 150 million migrant workers become city dwellers by 2020, it will unleash 5 trillion yuan ($814 billion) in domestic consumption.

But achieving this goal relies on whether or not the country manages to achieve demographic urbanization and a service sector boom. In 2012, China's nominal urbanization ratio was 52.57 percent. But the real ratio, i.e. if people without urban household registration are excluded, amounted to just 35 percent, which is well below the global average of 52 percent.

But if we take a gradual approach to revamping the current household registration system, China's urbanization ratio is set to grow 1.5 to 2 percentage points annually. If realized, the ratio will be lifted to more than 50 percent by 2020.

What is the key to demographic urbanization?

The answer is simple, the urbanization of rural migrant workers.

Demographic urbanization is the process by which migrant workers are gradually integrated into cities and enjoy the same status as their urban counterparts. The policy and system barriers that block their acquisition of an official urban identity have dampened efforts to release domestic demand.

Demographic urbanization will help China transform and upgrade its industrialization, and adjust its industrial structure, which is long overdue. It will also help the service sector rise to 55 percent of the country's economic aggregate by 2020.

I suggest that a clear timetable should be established. In the following one to two years, household registration should be waived in medium-sized cities and small towns. The next three to five years will see a unified national residence permit system adopted in the majority of cities, with the exception of metropolitan areas such as Beijing and Shanghai. In eight years, such a policy should be applied across the country.