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Home > Blogs > Anthony Harrington > Why China is changing its Hukou system to allow free movement

Why China is changing its Hukou system to allow free movement

Why China is changing its Hukou system to allow free movement Anthony Harrington

With a potential hard landing in sight for the Chinese economy, particularly if the eurozone implodes, the Chinese government has rather a lot on its mind right now. Amongst the huge tasks facing it – one thinks of the bad debt overhang in Chinese banks, or the almost out of control property bubble, not to mention factory riots when demand from advanced markets slows – one task that Western commentators tend to overlook is the need to fix China’s odd system of linking people’s rights and benefits to their place of abode.

Known as Hukou, the system was introduced in 1958 by the People’s Congress to stop people creating a food problem by giving up their small holding farms and fleeing the countryside for the richer pickings in China’s fast growing cities. Hukou has been relaxed a fair bit over the last decade, starting in the 1990s, but it still discriminates sharply between the rights available to rural people and the rights available to city dwellers.

Migrant workers who leave their rural homes to take work in the cities, do not necessarily get urban Hukou rights. This creates huge dissatisfaction among migrant workers, particularly when the city authorities refuse them a city hukou, which means they are only entitled to rural hukou rights.

According to a recent Goldman Sachs report on the Chinese Hukou system, some 167 million urban dwellers, or around one quarter of the total urban population of 622 million, hold rural hukou instead of urban hukou – meaning that a quarter of the urban population feel hard done by.

Holding a rural hukou can disqualify you for certain types of employment. It tends to shut you out of participating in retirement insurance (regarded as a city thing, otherwise you could grow your own food). And you’ll struggle to get your kids into nearby city schools – after all, you’re supposed to be in the countryside. Even worse, your children will not be able to participate in university education exams since they are not urban residents. And most cities won’t let you qualify for public housing without a local city hukou.

From the standpoint of the Chinese economy, which is starting to run out of a ready supply of labour in key demographic brackets (20 – 40 age group), anything that chokes off the movement of people from the countryside to the city is counter productive. Food security is, for the moment, far less of an issue, since a thriving economy can pay for all the food imports it requires. So the priorities of the late 1950s, which were all about anchoring the small farmers to the countryside, are way less important than maintaining some kind of downward pressure on wages through a constant stream of new recruits eager to experience city living and city wages.

From this standpoint hukou is very much yesterday’s policy, but like many grand bureaucratic schemes, it is proving difficult to unwind. Goldman Sachs point out that some cities are experimenting with the idea of dropping the requirement for hukou altogether. However, with China tightening public finances, there is a clear financial issue that city authorities have to solve. Dropping hukou will make a significant demand on the resources available to the city authorities, hence the foot dragging in the reform process.

There are several routes to improving the system. One is to improve the benefits and safety nets associated with rural hukou. Goldman Sachs quotes the head of the NDRC’s Societal Development Institute, Yang Yiyong as saying that the urban/rural hukou regime probably accounts for about 65% of the wealth disparity between the rural and the urban populations. As such it is a clear stumbling block to China increasing domestic consumer demand – a fundamental requirement for more balanced global trade flows. It will be interesting to see if China can dismantle hukou, which is very much part of the Party “command and control” system, without dismantling a shoal of other, equally iniquitous restrictions on the rights of its citizens. This is still, after all, command and control capitalism as pioneered and practiced by a Communist state.

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Tags: China , china government , China housing bubble , Chinese economy , future of china , Goldman Sachs , hard landing , Hukou , People's Bank of China , riots , urban/rural
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