China: Urbanization and Hukou Reform
Image Credit: REUTERS/Aly Song

China: Urbanization and Hukou Reform

 
 

Since taking office, Chinese Premier Li Keqiang has repeatedly emphasized the role further rapid urbanization will play in China's development strategy. Consequently, it is widely predicted that policies to spur urban growth will headline the major economic reform plan expected at November's crucial third plenary session of the 18th Central Committee.

However, Li has been keen to stress that future urbanization will be better planned and coordinated than before. Rather than focusing solely on the simple volume of new urban residents, Li wants urbanization to improve the quality of China's economic growth and the way the dividends are shared among the Chinese people.

As a key step in realizing these objectives Li has prioritized dismantling the "two-tier class system" that has emerged in China's cities, namely reform of the hukou household registration system. This will be crucial in both enabling existing migrants to fully participate in the economy and creating more attractive conditions to guarantee further waves of rural residents move to urban areas.

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However, reforming the hukou will be easier said than done. It will force the government to address a number of other serious challenges, not least the precarious financial position of many provincial and municipal governments and the politically very sensitive issue of land reform.

Signs are these issues are currently the subject of fierce debate within the Communist Party. We will only know how far China's leaders are willing to go in pursuit of reform following November's crucial meeting.

Compelling Factors

Since the hukou was introduced it has been used by the Communist Party as a means of administering and organizing the Chinese population to support the Party's political, economic and social objectives. Broadly speaking there have been three phases in its operation.

During the first, from the 1950s to the late 1970s, the Communist Party had the dual goals of the collective transformation of agriculture and the development of Soviet-style heavy industry. Therefore, the Party used the hukou to balance the rural and urban populations. Movement was controlled by limiting access to work, food and services to people's registration location.

During the second period, from the late 1970s to the mid 2000s, the Party's priority was to exploit China's massive rural labor surplus to support rapid economic expansion. To this end, restrictions on movement and work were lifted but other rules, such as those stopping rural hukou holders accessing urban services, were kept in place. The result was the creation of a large, mobile and crucially low-cost workforce that became the backbone of China's manufacturing and export orientated economy.

During the third and current period, as China's economy has matured and started to move up the value chain, it is generally agreed, even tacitly by the Communist Party, that the hukou system has lost its useful purpose in supporting China's development. Instead there is growing consensus that the 260 million migrant workers who now exist actually present an obstacle to the new priority of rebalancing the economy to be more consumption centric. An analysis of migrants' income, savings and home ownership rate illustrates this problem.

Figures from the National Bureau of Statistics show that in 2012 the average monthly wage of a migrant worker was just 2290 yuan compared to 3897 yuan for permanent urban residents. Migrant workers also save a far higher percentage of their income than permanent residents due to the lack of a social safety net. Their savings rate is 50 percent of income compared to 30 percent for permanent urban households. In terms of home ownership the disparity is even greater. A 2011 survey showed that just 0.7 percent of migrants had purchased a home in their adopted cities. This compares with a permanent resident rate of typically between 60 and 80 percent.

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