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13 Aug 2014

China reforms urban divide

Qu Hongbin

by Qu Hongbin

Co-Head of Asian Economic Research and Chief Economist for Greater China, HSBC

China reforms urban divide

The Hukou reform is attempting to break down barriers between urban and rural boundaries

China’s Hukou system, which divides people into rural and urban residents at birth, is at the heart of the institutional and economic inequalities in the country’s economy. The announcement of an overhaul in the household registration system marks a big step forward in breaking down decades-old institutional barriers between urban and rural lives.

It will also help China achieve its urbanisation target in a sustainable manner and maintain its potential growth rates by lifting productivity growth in decades to come.

This is the first time social security has been linked to residency rather than birthplace

Different types of Hukou status are to be merged into a standard residency status applicable to all, according to the reform document from the State Council. Education, healthcare, employment, social security, housing and land systems will be equalised.

Differentiated settlement rules for different size cities are proposed. Small and medium-size cities will see more relaxation, while mega cities may set more stringent requirements.

But across the country, those who have lived away from their permanent address for more than six months will be able to apply for a residency certificate and be eligible for basic social services. Those residing for longer can become permanent residents and eligible for a bigger package of services, such as public housing, pensions and social security assistance.

This is the first time that social security has been linked to residency rather than birthplace in recent economic history. Local government will have to provide basic education for migrant children, who will be able to take part in national exams as local residents. Other measures include acceleration of the registration of rural property rights.

Historically, the inability to settle meant migrants were often unable to make long-term plans for themselves and their families and frequently had to return to their birthplace after their prime working age. This results in significant under-utilisation of economic resources and prevents migrants and their children moving up the economic ladder.

The removal of this institutional barrier will improve the quality of urbanisation by integrating those migrants currently working in cities. They will be able to look for more permanent and better-paying jobs, which will help increase productivity in the near term.

While each locality may end up with a different settlement scheme and large cities may still be very hard to settle in, this is the first time a top-level decision-making body has set hard rules. Local governments will be barred from tweaking those rules to introduce further economic discrimination.

The Hukou reform will also help China reach its target of increasing the urbanisation ratio to 60 per cent by 2020 from just over 50 per cent now. We estimate that surplus rural labour should still be able to sustain an annual migration of around 10 million in the next decade.

Many will undoubtedly want to settle in cities given the considerable productivity and pay gaps. Easier settlement conditions will help sustain this.

In addition, migrant children will also benefit from better education and easier settlement rules. This will provide a longer-term support to China’s productivity and potential growth rate.

This research was first published on 31 July 2014.