Achieving Comprehensive Hukou Reform in China

Introduction

At present, China’s urban population includes 230 million of so-called “floating population”: residents of cities who lack a local urban hukou. Among these, more than 10 million are college graduates, including junior college.2

The floating population is growing rapidly. Indeed, while the urban floating population in 2000 was only 130 million, this category increased by 100 million people in just 12 years. As illustrated in Figure 1 below, the gap between the de facto urban population and the urban hukou population— that is, the floating population—has widened since the 1980s, a trend that is far from ideal. If this trend continues, it would not be a surprise if China’s floating population reaches as high as 300 million in ten years.3 And the fact is, “second-class” citizenship of such magnitude will be a big threat to social stability in China.

The challenge for China’s policymakers, therefore, is to “reverse” the problem: if, instead, only one-third of the floating population of more than 300 million gains middle-class spending power, this will increase the middle-class consumer group in China by 100 million, almost half of the country’s current middleclass population of more than 200 million. Since China’s policymakers are determined to increase the share

Paulson Policy Memorandum

Achieving Comprehensive Hukou Reform in China 1

In effect, China’s migrants need to become full urban residents.

the next six years, about 17 million people will be granted a local urban hukou each year, among which the number from the floating population granted an urban hukou will see a substantial increase, reaching perhaps 10 to 12 million annually. The Plan envisages that by 2020 the floating population as a percentage of China’s total population will decline by two percentage points, from the current 17 percent down to 15 percent.6

At the end of July 2014, the State Council released its “Opinions on Further Promoting the Reform of the hukou System” (hereafter “the Opinions”), which proposes an allout opening of hukou restrictions in towns and small cities, the opening of hukou restrictions in an orderly fashion in medium-sized cities, reasonably determining conditions for hukou registration in large cities, and the strict control of population sizes in very large cities. Differentiated policies for urban hukou registration were also specified.7

The Plan and the Opinions represent an important first step in hukou reform, and exemplify the Chinese central government’s resolve to alter the current system. The Opinions offer more clearly defined principles for how citizens who leave their permanent hukou residence to live in a city for half a year can gradually attain rights to basic public services in the city.

Paulson Policy Memorandum

of consumption in the economy, the power of a new class of spenders of this magnitude cannot be ignored.

Since the natural urban population growth rate in large cities,4 among households with urban hukou status, is currently very low (and has even been negative in some years),5 it is difficult to imagine how China can achieve a substantial increase in the urban middle class population by relying solely on that part of the population that is currently—and legally—registered with an urban hukou. So to promote domestic demand as a growth driver, China must principally rely on the urbanization of rural migrant workers, thus expanding the country’s middleclass population.

How can such hukou reforms be implemented?

In March 2014, China’s central government released its “New National Urbanization Plan” (hereafter “the Plan”), which proposes “granting approximately 100 million rural migrant workers and other long-term residents a local urban hukou” by 2020 (see Figure 1). The priority group is migrant workers with stable work in urban areas, but other groups are included: graduates of universities and vocational and technical schools, workers from other cities, and local population with a rural, rather than urban, hukou. This means that over

Achieving Comprehensive Hukou Reform in China 2

This policy memorandum recommends that hukou reform move more quickly and be opened more widely. The memo presents a plan that builds on the central government’s Plan and Opinions. It proposes comprehensive reform objectives, timetables, and concrete measures. Moreover, it attempts to take a longer term perspective, offering a vision of how various aspects of reform might fit together, and also how to give members of the floating population expectations and hope to plan for a potential future. Such faster and deeper reforms will, in fact, be beneficial for social stability.

Paulson Policy Memorandum

Yet the Plan is merely a six-year program, and according to the rate of change outlined in the Plan, completely resolving the floating population issue— that is, bringing down the floating population percentage to zero—will probably require the work of another three or four decades.

Another problem with the Opinions is that it envisages little opening of hukou registration in very large cities, and thus does not really meet the longstanding earnest desire of university graduates, professionals, and entrepreneurs who do not have the local urban hukou to obtain one.

Figure 1. Urban Population Growth Trends and Projections, 1980-2030

Sources: China Statistical Yearbooks; China Population Statistical Yearbooks; figures for 2013-2020 are from National New-Type Urbanization Plan; those after 2020 are the author’s.

Achieving Comprehensive Hukou Reform in China 3

Paulson Policy Memorandum

Costs and Dividends of Hukou Reform In considering how hukou reform is to be achieved, some believe that the urbanization of migrant workers will involve costs that the public—or more precisely, the government—cannot bear. In fact, this point of view is comprised of various misconceptions and blind spots.

In recent years, some relatively comprehensive estimates have concluded that granting an urban hukou to a typical migrant worker (including his or her dependents) will incur lifetime public expenditures of approximately 100,000 yuan ($16,287) based on 2010 constant prices.8 This includes the major public welfare benefits and services: compulsory education, cooperative medical care, pension insurance, and other social security (such as subsistence allowance), as well