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07 Aug 2013

Hey, big spenders

Qu Hongbin

by Qu Hongbin

Chief Economist for Greater China, HSBC

Hey, big spenders

For rural migrants in China, land is the major source of security

Since China’s economic reforms began in 1978, the number of people living in cities has quadrupled to more than half the population. This signals substantial potential demand that should power economic growth.

However, hundreds of millions of these migrants do not lead normal city lives. Their official status limits or denies them access to employment, health, education and other services, forcing them to travel to and from their homes in the countryside.

At the centre of the problem is the hukou system of household registration that limits urban-residence permits for rural migrants. However, we believe equally important is the land tenure system that binds migrants to the countryside for fear of forfeiting the right to their plots and homes if they move away permanently.

Currently, 160 million migrant workers live in cities but lack access to the same public services as residents with a city hukou. However, Xu Shaoshi, Commissioner of the National Development and Reform Commission, China’s top planning department, has announced detailed guidelines for eliminating China’s household registration barriers.

China’s urbanisation rate is estimated by some to reach 70 per cent by 2030. This implies 360 million people will move from rural urban areas to the cities

He proposes fully liberalising residential permits for towns with fewer than 200,000 people with an orderly relaxation in cities of up to 500,000 and gradual easing for cities with populations of 500,000 to 1 million. In even bigger cities, qualified rural migrants will gradually become city residents.

This is the first time Beijing has clearly stated a reform plan for the hukou system, which was introduced more than half a century ago.

Labour market mobility should be enhanced by the reform. It will not only permit rural workers to stay in the city permanently, but also represent local government’s responsibility for providing public services.

City jobs pay a reasonable income and moving from agricultural into manufacturing involves a significant leap in labour productivity. City clusters in the Pearl River Delta, Yangtze River Delta and Bohai Ring Megalopolis now account for 18 per cent of China’s population and 40 per cent of national GDP. Yet all of this happens on less than 4 per cent of China’s land area and land ownership has played a more prominent role than the hukou in holding back rural residents’ mobility.

China’s urban land is owned by the state, while rural land is collectively owned by farmers. For rural migrants, land in their home town is their major source of security but the existing land requisition system has prevented farmers from receiving higher compensation and sharing capital gains from the land.

Beijing has now promised to clarify farmers’ rights to their land and finish the registration and certification system within five years. As a result, land transactions will be speeded up and rural-urban migration strengthened.

China’s urbanisation rate is estimated by some to reach 70 per cent by 2030. This implies 360 million people will move from rural urban areas to the cities. The authorities have identified five public services related to incorporating rural migrant workers into urban life. They are: children’s education, medical care, public housing, pension insurance and other social-security expenditures, such as unemployment benefits.

But urbanisation of an estimated 260 million rural migrant workers and an incremental 360 million rural-urban migration between 2013-2030 could cost the government an enormous sum. The total fiscal cost for local and central governments on the most pressing issue of public housing and children’s education is expected to total more than half of China’s 2012 national fiscal revenue.

Knocking down institutional barriers by implementing land reform and changes to the hukou system will help unleash the potential of urbanisation and speed up productivity gains.

We will still see a rising migrant worker stock in the cities because China’s surplus labour in the agricultural sector remains abundant. However, the growth rate could decrease gradually. This could continue to act as a buffer for a structural increase in the wages of migrant workers.

This research was originally published on 29 July 2013.

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