The End of China’s Onerous Hukou System

The announcement on July 30 that China will finally overhaul the hereditary household registration system, known as hukou, hopefully eases a system considered to be at the heart of China’s institutional and economic inequality.

It won’t happen immediately and there is some concern on the part of critics that the State Council’s decision is more window dressing than real. It doesn’t do away with the registration system, merely changes it. Different types of hukou status are to be merged into a standard residency status applicable to all. But those moving to new areas still must apply for residency certificates that would enable them eventually to apply to change official locations. If officials in the new areas don’t allow migrants to register, the problem continues.

The system has been in place since the 1950s, requiring individuals to identify themselves as residents of the area in which they were born. Registration includes the names of parents, spouses and dates of birth and has been regarded by many as virtually a caste system that condemned generations of rural residents to poverty and poor education. As many as 150 million rural workers are already in the cities, unable to take advantage of education and social programs.

When Deng Xiaoping opened the country to investment in the 1970s, hundreds of millions of workers began to leave their villages for industrial centers in the Pearl River Delta, Beijing and Shanghai and others. But doing so meant abandoning their rights to education and health and social services, not only for themselves but for their children, unless they returned to their rural roots, which they largely needed to do after the end of their prime working age, stalling them out on the economic ladder.

It is certain that the system has contributed to China‘s rising wealth inequality, economists say. It is estimated that 1 percent of the population holds a third of the country’s wealth. The Gini coefficient, a widely used indicator of economic inequality, has grown sharply. Two decades ago the measurement for wealth was 0.45. It has now risen to 0.74 on a scale in which zero represents absolute equality and 1 represents absolute inequality.

Prime Minister Li Keqiang since taking office in October 2013 has made reform a key to his drive to move as many as 250 million people from low-productivity work in agriculture to city factories and service industries, arguably the biggest social experiment in world history. The hukou system is the biggest impediment to achieving that goal, which means raising the urbanization level from 52.6 percent in 2012 to 60 percent in 2020.

Removal of the limitations, if indeed they can be pushed through at the local level, has considerable implications. Some 33 million households are to be added to the cities by 2020, assuming three persons per household, raising demand for entertainment, housing, cars and other possessions, generating demand estimated at RMB5 trillion. It should boost demand for urban infrastructure such as roads, bridges, hospitals, schools and healthcare, greatly stimulating consumption although at the same time it presents enormous problems in accommodating the move to the cities that Li envisions.

The State Council decision says that in the meantime all residents are eligible for the same basic services as the resident population, including employment, healthcare, education, cultural activities and administrative services.

Those who stay longer in their new residencies will become eligible for more extended social services such as vocational training, public housing, pension and other assistance and their children are to be allowed to participate in national exams as local residents.

Cities with fewer than 1 million residents will remove all restrictions for resident migrants. Larger cities of 3 to 5 million population will be allowed to limit residency to five years. The six cities with populations over 5 million will create point-based systems to meter the influx of residents.

The change in the system will generate significant problems that the government will have to solve, including transferring the current rural social security system to an urban one when the migrant receives residency. China’s entire pension system will have to be revised. Property registration must be revised.

Each of China’s urban areas is expected to deliver different arrangements to settle the newcomers. Local governments have to be discouraged from promulgating their own rules to discriminate against the migrants. Phasing out hukou is designed to make the cities more attractive and less expensive by bringing the migrant workers into the local housing, education and welfare systems.

These are reforms, however, which run up against the interests of the established urban populations. NIMBY – the acronym meaning “not in my backyard” – can be expected to take on new currency as new roads, power plants and other infrastructure irritate the permanent residents of the most attractive cities as they react to the influx of the new arrivals.

There is also the question of China’s population increase, which has now almost leveled off. China has a total fertility rate – the number of children born to women of childbearing age – of 1.55 against a replacement level commonly estimated at 2.1. The population will continue to grow in the short term because of the number of young women of childbearing age although it is expected to level off and start to decline in about 2050. State planners earlier this year already relaxed the notorious one-child policy, granting parents who were only children the right to have more than one. That may not be enough. As in other urbanized countries across Asia, active programs to attempt to stimulate more births have largely been ignored. South Korea, Taiwan, Singapore, Malaysia and Thailand all have total fertility rates far below replacement. Even if the one child policy is completely abolished, urban living costs make the opportunity cost of child-rearing very high.

The general aging of the population combined with the earlier exodus of young people to the cities has resulted in the rural population being significantly older than the urban one, so it isn’t sure how many people will flood to the cities. In some rural areas as much as 30 percent of the people are already 60 over while 75 percent of those now 30-years old who were born in rural areas have already migrated.

China’s policies are moving slowly in the right direction of raising manpower productivity and reducing income inequality between urban and rural, migrant and non-migrant. But it remains to be seen how much of a boost the relaxation of the policy will give to urbanization.