As China Lifts Migration Rules, Growth Will Follow

Amid China’s worst economic downturn in many years, the housing sector is starting to show life. In a way, that’s not surprising: Chinese have long viewed real estate as a haven in good times and bad. But this time, something different is happening. The market isn't just warming up in the obvious places, such as Beijing and Shenzhen; it's booming in regional hubs like Jinan, where May sales were up a whopping 97% over the monthly average last year.

As Bloomberg News recently reported, the key factor is an effort to reform China’s residential-permit system, which limits housing ownership and other benefits to locals. In cities where those permits, known as hukou, have been loosened, housing sales have soared. It's a reminder that China’s recovery from this crisis won't simply require spending more money — in many ways, it'll mean letting go.

Chinese governments have imposed restrictions on the movement of citizens for centuries. But the modern notion of a hukou can be traced to the Soviet Union's issuance of internal passports to achieve centrally planned allocations of ethnicities and labor. That kind of control appealed to Mao Zedong and his apparatchiks, and in 1951 they enacted China's first modern hukou law, which permanently fixed an individual and his or her heirs to a given location and imposed strict controls on migration from it.

The end of collective farming in the 1970s presented a significant challenge to this system. As economic reforms accelerated, hundreds of millions of people left the countryside for new workplaces and homes in towns and cities where they didn't hold a hukou. Rural migrant laborers now make up an estimated 36% of China's total workforce. Some of them have temporary permits to reside in other areas, but many — by some estimates, 40% of Shanghai’s residents — don’t.

That’s one reason why the hukou has been one of China's most-hated policies for decades. Cities have long afforded residents better social benefits, ranging from relatively rich pensions to generous housing subsidies. And China's economic boom was partly fueled by workers moving from low-productivity farming to higher-productivity urban jobs. By impeding internal migration, the system effectively inhibited upward mobility.

These awkward facts have inspired occasional reform efforts over the years. But even changes that were explicitly designed to promote urbanization — such as allowing workers to move between smaller cities and towns using temporary permits — didn't break from the fundamental principle that a hukou is designed to exclude people, especially from the most prosperous regions.

Now, thanks to an economic slowdown that predates Covid-19, those barriers are finally falling. In December, President Xi Jinping — reportedly a longtime advocate of hukou reform — touted the free movement of labor as a necessary ingredient for new "city clusters" that are intended to boost economic dynamism. Shortly thereafter, China's top policy-making body, the State Council, pledged to eliminate the system for all but the biggest cities.

The benefits are already clear. By lowering the bar to home ownership in some of its most attractive cities, China is creating new markets for skilled labor that might have otherwise stayed home and remained underemployed. Hangzhou has seen an influx of 554,000 new residents in the past year — 10 times the growth of more restricted Shanghai.

Not everyone will be better off, of course. Hundreds of millions of farmers and rural migrants without tertiary educations will remain tied down by the hukou, for one thing. But the reforms give reason to hope that the government may yet go further. In the meantime, the progress ushered in by dismantling the hukou's authoritarian excesses is a potent reminder that the fastest route to enabling China's post-Covid recovery is for the government to loosen its grip.