Hundreds of millions of Chinese live in China’s biggest cities as second-class citizens, with no access to social benefits and limited ties to the locales in which they work. Their situation leads to unhappiness, lower consumption, and lost productivity.
The culprit: China’s household registration—or hukou—system. The hukou, a small red passbook, contains key information on every family, including marriages, divorces, births, and deaths, as well as the city or village to which each person belongs. What comes attached to the hukou are benefits including health care, a pension, and free education for one’s children. These benefits are only available if a Chinese citizen lives where he or she is registered. Not having a hukou for where one lives makes it more difficult to get a driver’s license, buy a house, or purchase a car.
As China strives for a more balanced economy, top policy-makers are realizing that the hukou system is a liability. Late last month, China’s cabinet announced plans to make it easier for rural migrants to obtain a city hukou (pronounced hoo-ko). On March 5, Premier Wen Jiabao told the National People’s Congress that migrant workers will become “permanent urban residents in an orderly manner” as China eases restrictions. “The hukou system is morally indefensible in today’s China. It’s also due for an overhaul because the system impedes economic growth and urbanization,” wrote Hu Shuli, editor-in-chief of China’s reformist Caixin Century Magazine, on March 8. This doesn’t mean the hukou system will be swiftly dismantled: Authorities fear that would trigger a nationwide flood of migrants into the biggest cities and raise the prospect of mass unrest. Providing social welfare benefits to new urban residents will also be costly.
Although Chinese family registries have been around for centuries, today’s hukou system began in 1958 as a version of the Soviet Union’s internal passport regime. The hukou forced farmers to stay put and produce cheap food to sustain industrialization. With the economic opening, it evolved to allow massive migration from the country to urban enterprises and export factories. The qualifier: A worker’s residency did not transfer to the city. Neither did his right to health benefits and free education.
The hukou system helps explain an economic anomaly; private consumption’s contribution to gross domestic product dropped from 46 percent in 2000 to 33 percent in 2010. That’s the reverse of what economists would expect with an ever-bigger urban population, points out Louis Kuijs, an economist at the Fung Global Institute in Hong Kong.
While China had a city population of 690 million last year, more than 200 million lack an urban hukou, estimates Kam Wing Chan, a professor at the University of Washington in Seattle. Separated from their families, unable to tap into the urban network of government benefits, often living in company dorms or cheap housing, these migrant workers don’t know what the future holds and fear the outcome of a crippling work accident or lost job. In reaction to all this uncertainty, they save instead of spend and never form the solid urban households that are the backbone of any middle class. “The hukou system is holding up full urbanization, one of the most obvious ways to achieve more consumption,” says Kuijs. Because of the persistence of the hukou system, says Washington’s Chan, “the assumption that China’s urbanization will create a very large middle class is proving not accurate.”
The plight of Deng Zongwei illustrates the problem. A lighting engineer with a good job in Dongguan in the Pearl River Delta, he had to move his wife and 5-year-old son back to his hometown of Yongzhou, Hunan, last July, and has been taking the 10-hour-long bus ride home every month. If his family had stayed with him, they would have had to pay for public school in Dongguan. “School here would have cost ¥12,000 ($1,900) a year. In Hunan, it doesn’t cost us a penny,” he says, adding that his wife had to quit her job to live with their son. “This is a huge problem for all migrant workers in China. It makes our lives painful and difficult.”
State-owned enterprises in Beijing and Shanghai are allotted thousands of new hukou every year to make it easier for them to hire promising job candidates from the hinterlands. Inevitably, some of these allocated hukou end up on the black market. In Beijing, a university graduate can purchase a hukou that originated with a big SOE but ended up in the hands of a black market dealer. The price: up to ¥150,000, says Wang Kan, a professor at the China Institute of Industrial Relations in Beijing. On Internet chat sites, brokers offer hukous for sale; some are legitimate albeit sold illegally, while others are fakes, says Wang. One recent graduate from a Beijing university purchased a hukou for ¥70,000 from a state-run food processing company to stay in the capital. A wealthier student about to graduate from another university paid ¥100,000 for a hukou to make it easier to buy Beijing real estate. Both declined to speak for this story, citing the sensitivity of dealing in the illegal trade.
The hukou system makes business difficult for Ben Schwall, founder of a Dongguan-based supply logistics company. Many of his employees, including engineer Deng, take time off to move their school-age children back to their hometowns, says Schwall. Others want leave to oversee construction of homes in their native villages. “Hukou problems are crescendoing in Dongguan and right here in my office,” he says.
One reform of the system would award urban hukou to those migrants deemed worthy. Since mid-2010 in the coastal province of Guangdong, migrants have vied to earn the 60 points necessary to qualify for a hukou in the cities of Dongguan, Shenzhen, Huizhou, and Zhongshan. Education and skills, years of work in the city, and even good deeds like giving blood are taken into consideration. Engineer Deng says he isn’t interested: He may decide to retire in his hometown, an option he would lose if he gets an urban hukou. “Why doesn’t the Chinese government drop this hukou policy so our lives are not so complicated?” he asks.
Other reforms now being tried: awarding hukou to a tiny elite of university grads at the top of their classes or to superwealthy Chinese who also invest in a city’s economy. Chongqing and Chengdu are now offering urban hukou to nearby farmers willing to give up their land in return for urban benefits. Chongqing hopes to convert 10 million people to urban status by 2020.
In part because of the one-child policy, China is facing severe labor shortages. “There is a cold economic logic—you want to have mobility of labor so that you can use the enormous pool of human resources China has as efficiently as possible,” says Andrew Batson, China research director for GK Dragonomics in Beijing. “That means breaking down barriers so people can move more easily and work and live where the demand is.”
Hukou reform will focus for now on the smaller cities. Strains on municipal infrastructure as well as security problems have delayed liberalization in the biggest cities, says Stephen Green, Shanghai-based China economist at Standard Chartered Bank. Adds Qi Yanhong, who works in a jewelry factory in Guangzhou while her son lives with her in-laws some 10 hours away: “We have no real choices—we are subject to the whims of China’s official policy. That is the reality for China’s workers.”