Put simply, because migrants earn less and have less security they play a much smaller part in the economy than permanent urban residents who have better access to well paid jobs and social services. Therefore, without reform, the hukou system will lock out ever greater numbers from China's emerging middle class and make economic rebalancing an uphill battle.
However, the increasingly negative effect of the hukou is not only limited to the economic sphere. The part the system plays in widening inequality is also starting to weigh heavily on public sentiment.
Recent figures from the Pew Research Centre Global Attitudes Project show that worries about inequality are mushrooming. Data show 52 percent of the public now consider inequality to be a “very big problem," a jump of 11 points from 2008. Left unchecked, this growing dissatisfaction could precipitate serious social unrest as millions feel they are being left behind while a privileged elite surges ahead.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Therefore, there are compelling reasons for reform. However, the difficulty in transforming rationale into action lies in the fact that the hukou cannot be tackled in isolation. Instead the government must also address other highly sensitive issues that are related. It is for this reason that genuine and widespread reform has not come sooner.
The Complexities of Hukou Reform
Resolving who pays for reform is one of the key challenges. Since a major tax overhaul in 1994 local governments have been left with a substantial gap between the amount of tax revenue they receive and their spending liabilities. It is estimated that while local government is responsible for around four fifths of expenditure they only receive half of this from tax.
This disparity has forced local officials to devise alternative ways of funding their spending obligations. Many cities have resorted to the socially destructive practice of illegal land seizures. However, with the amount of available land diminishing local governments have been piling up debt. When combined with the liabilities arising from the credit-fuelled infrastructure stimulus of 2008/9 local government finances are now in a parlous state.
Consequently local governments are deeply opposed to hukou reform. A 2012 project led by the National Reform and Development Commission, which interviewed city leaders across eight provinces, found nearly all said their administrations could not afford the extra spending to provide public services to hundreds of millions of migrants.
Therefore if hukou reform is to be central to China's new urbanization strategy China's leaders will have to agree how to resolve the funding issue. Will fiscal policy be reformed to give local governments a greater share of revenue? Will a cost-sharing model be developed between central and local government? Will local governments be given new means of raising revenues?
Without answers to these questions it is hard to see how substantive hukou reform can be delivered. Worryingly in recent days, with only weeks until the new urbanization strategy is expected, there are signs this issue is still far from being resolved. For instance Lou Jiwei, China's Finance Minister, is reported to be resisting calls for local governments to receive a higher share of tax revenues over concerns the funds would be used for vanity projects rather than public services.
Further, the financing of hukou reform is not the only area subject to fierce debate. Another is one of China's most politically sensitive issues – land reform.
Counterintuitive as it may seem a 2011 survey by the National Population and Family Planning Commission found that if offered an urban hukou only 26 percent of migrants would accept. This is because although a rural hukou has many disadvantages a key benefit it brings is that migrants retain their rural land use rights. Given the precarious nature of urban life migrants therefore often see this as a source of security even if they have no intention of returning to their villages.