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China's Hukou Reforms and the Urbanization Challenge

 
 

China’s government has announced a lofty goal of expanding urban hukou or residency permits to 100 million migrant workers by 2020 as part of its plan to rebalance its economy. However, the government needs to deliver a whole range of supporting policies to achieve this goal and it may not have the financing to provide them.

China’s hukou system is one of the most pressing areas for policy reform. It is both a direct cause of economic and social inequality and a major obstacle to China’s goal of building a highly urbanized, consumer-driven economy.

The hukou system designates a resident’s status as being either rural or urban based on their registered birthplace. In practice, this means a migrant worker from the countryside is not entitled to public services in Shanghai, despite working and living in the city.

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What’s more, migrant workers living and working away from their hometown face discrimination in labor markets, are cut off from home loans, and face challenges in getting a good education for their children. With the migrant worker population numbering an estimated 277 million, according to China Labor Bulletin, China is facing a huge task to both quell potential unrest and to provide social services to this huge demographic group.

But the Chinese government has lofty goals to remedy this situation, with the State Council, China’s most senior policymaking department, recently committing to the goal laid out by Premier Li Keqiang of giving urban residency to 100 million migrant workers by 2020.

Recent data indicates that the government is making progress. On February 11, China’s Ministry of Public Security announced that it had issued 28.9 million new urban residency permits in 2016, with 1.69 million issued in Beijing, 406,000 in Shanghai, 810,000 in Guangzhou, and 1.71 million in Shenzhen.

But migrant workers’ chances of acquiring an urban hukou differ considerably across China.

New hukou rules introduced by local governments in China’s largest cities, such as Beijing, Shanghai, Guangzhou, and Shenzhen, as well as Chengdu, Wuhan, and Xi’an, make it tough for migrant workers by grading an application according to a points system based on an applicant’s education level, tax payments, and work experience.

Lower-tier cities, which are less developed and have smaller populations, have introduced comparatively easier regulations, in line with the central government’s goal of channeling migrants to these areas and providing extra labor to boost economic growth. That’s why China’s Ministry of Public Security stated recently that the points-based system doesn’t apply in cities with less than 3 million permanent residents in downtown areas.

But despite the government’s attempt to attract migrant workers to lower-tier cities and drive economic rebalancing toward its less developed regions, migrants moving to these areas face huge challenges, meaning that many millions of migrants have no interest in applying for an urban hukou at all.

For starters, migrants having to give up their land rights in rural areas as part of their application for a urban hukou are often not compensated properly, if at all. Indeed, disputes over improper compensation, or blatant expropriation by responsible government bodies, are the main source of unrest in China. Aside from having little left over to start again in a nearby city, migrants also lose their main source of support in their hometown should things go wrong. Despite regular government promises to secure property rights and ensure adequate compensation, swathes of research show that little has changed, meaning migrants have less incentive to consider moving to a local city.

While China has seen a massive build out of real estate, most of it is so expensive that new migrants just can’t afford it. With this in mind, local governments across China have made subsidies available to new city residents but they remain too small to make much of a difference, according to research by Bank of America Merrill Lynch. What’s more, China’s efforts to build affordable housing to meet migrants’ demand, though in some cases successful, have been undermined by embezzlement, misallocation of new housing units, misreporting of actual units constructed, and poor quality construction.

Aside from a lack of appropriate housing, finding work in a new city can be a challenge for migrants. Research into urban resettlement in Chongqing showed that over half of 960 surveyed migrants found it difficult to find stable jobs, with many citing a lack of familiarity with the city and a lack of social networks. Furthermore, the government’s drive to encourage migrants to lower-tier cities by offering them an urban hukou may just be not be attractive. In contrast, China’s megacities are huge economies in their own right, with a much wider range of developed industries, companies, and job opportunities, which often pay much more than lower-tier cities.

Despite the promise of access to social services to new migrants, service quality is still a concern. The government has made huge investments. but China faces large shortages of doctors and other medical staff to meet surging demand. It’s a similar situation in the education sector, where standards, particularly in developing areas of the country, remain low.

Policy experiments in Chongqing showed some success in addressing these challenges.  During Bo Xilai’s tenure as party secretary of the city, the Chongqing government spent $15 billion, built 13 million square meters of public housing, issued three million urban hukou, and invested in health care, education, and social security. But the cost of providing such large scale improvement meant that the underlying policies for Chongqing’s success have not been applied wholesale in other parts of China.

And the cost of offering a comprehensive policy plan to support widespread hukou roll-out means that the above challenges facing would-be migrants are unlikely to go away soon. The Chinese Academy of Social Sciences estimates that it costs RMB 100,000 ($14,500) to provide public services like education and healthcare to each new migrant eligible for urban hukou residency, which means RMB 100 billion ($14.5 billion) for every additional 1 million migrants given urban status.

Given the parlous financial state of many local governments across China, the funds may not be available to finance the policies required to expand urban hukou entitlements. Local governments across China had a total of RMB 17 trillion ($2.5 trillion) worth of debt at the end of 2016 and this means that they are often unable to finance the necessary services to meet demand stemming from a large inflow of new residents.

In sum then, the challenges of both attracting and absorbing the millions of new urban residents targeted by the government in its hukou reform initiative require a whole host of supportive policies and appropriate funding. Given the scale of the job, China’s aspirations to meet the needs of its migrant workers and build a highly urbanized, consumer-driven economy may take a lot longer than previously thought.

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