Hukou Reform: Central Government sets out a vision - August 2014

0.1 Detail

On 24th July China's State Council released guidance on measures that should be taken to relax the household registration (Hukou) system. The stated aim is to create 100 million new urban residents by 2020. The measures announced will now need to be implemented by provincial and municipal governments.

Background to the Hukou system

Household registration system dates from 1958 and is designed to control population movements by dividing people into rural and urban residents. Until the 1980s it was almost impossible for rural residents to get non-agricultural work in the cities. Over the past 30 years hundreds of millions of workers migrated from the countryside to work in urban factories and construction sites.

However, despite living in the city, these workers maintain their rural residence status and are unable to access the same education, healthcare and welfare provision as official city residents. For example, rural Hukou holders must complete a series of complex bureaucratic procedures and pay substantial fees before they can enrol their children in city state schools.

Incentives for reform

The Hukou system was in the past effective at helping China manage internal population movements, but it has become a source of deep discontent and is an obstacle to further economic development. For many years, it has been argued that Hukou reform will:

boost consumption: Research indicates that across China a 1% increase in the urbanization ratio increase will generate RMB 120 billion in household consumption as citizens without an urban Hukou tend to save more to compensate for poor social service provision.

reduce inequality: the differences in education, health and social services provided to urban and rural Hukou holders generate significant inequality and discontent. In a research conducted by Pew Research Centre in 2012, 52 percent of the public considered inequality to be a 'very big problem', a sharp increase from 11 percentages in 2008.

The road towards reform

The central authorities announced at the Third Plenum that Hukou reform would be a priority. The guidance issued in late July is the first concrete statement from the centre clarifying for local government what reform should involve. In the meantime a number of Provinces have announced their own more detailed plans for reform in this area, these plans give us some idea of the likely impact of the State Council guidance.

For example, Guangdong, home to 12% of China's migrant population, announced its own reform package in June. The targets announced in the package are ambitious and in line with those subsequently announced by the State Council: 73% urbanization ratio by 2020 (VS 67.4% by 2014) and new urban Hukous for 13 million migrants. However, while the policy reforms announced satisfy all the requirements set out in the State Council guidance, their impact is likely to be limited. The main focus is on making it easier for university educated rural residents to get a Hukou. Commentators complain that this plan falls well short of the central government vision of improving the lives of China's hundreds of millions of largely low skilled migrant workers.

More substantial reform is seen locally as challenging, especially given Guangdong's vast population of migrant workers. The key problem is where the money to pay for improved services for new urban residents will come from. Guangdong's goal of granting 13 million people an urban Hukou before 2020 is estimated to cost RMB 1.7 trillion and the provincial government is expected to foot this bill in full. Unfortunately, at the moment provincial government's sources of revenue are increasingly limited: they contribute over 50% of the tax take to central government and are now being encouraged to reign in land sales and reduce debt. Moreover, rapid easing of restrictions is likely to be difficult to manage: the experiment with loosening Hukou restrictions in Zhengzhou in 2001, the provincial capital of Henan Province, had to be cancelled because the government was simply unable to provide school places and other facilities to the vast numbers of people who sought to take advantage of the scheme.

While the limited reforms which Guangdong has now proposed are unlikely to benefit the majority of migrant workers, the government hopes that they will support the province's strategy of upgrading the economy by attracting highly skilled migrants. In much slower time the Province is working to erode the difference between the treatment enjoyed by rural and urban Hukou holders by increasing the scope of universal service provision.

0.2 Comment

Until central-local fiscal imbalances are addressed, progress is likely to be slow on Hukou reform in places where it matters, like Guangdong and other coastal areas.

The most ambitious reform plans may well be announced in Western and Central parts of China where far fewer people want to live. Chongqing is already experimenting with rural land trading with the urban Hukou system.

The medium term prospects are brighter. The June announcement of a new national plan to deepen fiscal and tax reform and expand the tax resources available to local government may help provide local authorities with more resources to address Hukou reform.

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