Moving mountains – hu kou reform in China

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China takes steps to reform its decades-old household registration (or hu kou) system.

The market sees this as a significant step towards greater labour mobility, which in turn should unlock productivity gains and “dead capital”[1] in the rural regions. In reality, the impact of the reform is likely to be very limited because to obtain the full benefits, China would have to scrap the system altogether. Beijing knows that such a move would face severe resistance and is unthinkable in the short term. So the reform guidelines are more a sign of incremental progress than a big step forward.

On coming to power in 1949, the Communist party instigated a command economy. One of its instruments was the dual hu kou system that since 1955 has divided households into urban and agricultural. Different hu kou holders enjoy different social benefits and the system provides a means of controlling the movement of people between rural and urban areas. Urban hu kou holders receive better education, medical care and pensions than their rural counterparts who are entitled to farmland usage rights and are allocated rural land to build houses.

Under the reform plans, the rural-urban distinction will be replaced with a unified hu kou system. Some analysts have jumped to the conclusion that this would mean giving rural residents the same rights as urban residents in terms of employment, education, medical care and housing. Such a change would greatly facilitate urbanisation.

This is however not entirely the case. The reform does not totally remove the rural-urban distinction and, thus, does not scrap all the barriers to migration and labour mobility from rural to urban areas. The plans state that a system of “residence permits” would be set up to allow qualified migrants to enjoy urban services and social benefits. Whether a rural emigrant is eligible and to what extent they can enjoy these benefits depends on how long they have lived in the city and how long they have contributed to social insurance programmes. Anyone who does not have an urban residence permit will still not be entitled to equal urban benefits, whatever type of hu kou the person holds.

This dual hu kou system makes rural migrants feel discriminated against and hinders migration within the country. The reform is trying to narrow the difference between the two types of hu kou. It is intended to be implemented initially in towns and small cities, where a resident who has lived long enough to get a residence permit can apply for an urban hu kou and enjoy urban social welfare benefits.

The numbers of people potentially involved are massive – China plans to urbanise 100 million rural residents and migrants by 2020. Official data shows an urbanisation rate of 51%. This still lags the rate in many other countries which boast a rate of more than 70%. Crucially, China’s genuine urbanisation rate is only about 32% when adjusted for the 260 million migrant workers who work and drift between cities and never contribute effectively to urban spending because they tend to save and send the money back to their hometowns. Granting residence permits to these migrant workers could effectively help boost GDP growth via investment and consumer spending.

Eliminating the rural-urban difference and, eventually, the hu kou system altogether is easier said than done. Urbanisation will require all levels of government to spend more on social welfare and construction. However, under the current asymmetric budget structure, local governments pay for 80% of their fiscal spending; they have to remit 100% of their fiscal revenues to the central government but only get 40% of that back in the form of fiscal transfer. Thus, many local governments are financially strapped and are resisting any hu kou reform that would facilitate urbanisation.

Ultimately, hu kou reform cannot succeed without parallel land reforms that would allow farmers to trade their farmland and transfer land titles in the open market to unlock their “dead capital”. Medicare and pension programmes will also have to be unified nationwide so that people can enjoy equal services wherever they live in China. All these involve fiscal, land and social welfare reforms, which will take longer than many observers may expect, but are essential as China strives to become an urbanised, modernised nation.

[1] See “Understanding China’s Growth: Forces that Drive China’s Economic Future”, Chi Lo, Palgrave Macmillan 2007, pp. 33-38.
Chi Lo

Senior Economist for China

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