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Paulson Policy Memorandum
Achieving Comprehensive Hukou Reform in China
Kam Wing Chan
December 2014
Paulson Policy Memorandum
About the Author
Kam Wing Chan
Kam Wing Chan is Professor of Geography at the University of Washington. His main
research program focuses on China’s cities, migration, employment, the household
registration system, and related statistics. In recent years, he has served as a consultant
for the World Bank, United Nations, Asian Development Bank, and McKinsey & Company
on a number of policy projects related to China’s cities and economy. He is the author
of Cities with Invisible Walls: Reinterpreting Urbanization in Post-1949 China, and some
60 journal articles and book chapters. His recent commentaries and interviews have
appeared in the Wall Street Journal, New York Times, Economist, China Daily, South
China Morning Post, BBC, China Radio International, CBC Radio, Caixin, and other media.
His webpage is http://faculty.washington.edu/kwchan/.
Cover Photo: Reuters/Jianan Yu
Paulson Policy Memorandum
Introduction
T
he reform of China’s household At present, China’s urban population
registration system—or hukou in includes 230 million of so-called
Chinese—is a major issue for the “floating population”: residents of cities
country’s future development. China who lack a local urban hukou. Among
has less arable land than the United these, more than 10 million are college
States, yet more than 200 million graduates, including junior college.2
Chinese still depend on agriculture for
their livelihood and more than 800 The floating population is growing
million citizens are registered with the rapidly. Indeed, while the urban floating
government as having a rural hukou.1 population in 2000 was only 130 million,
For China to further develop, it is this category increased by 100 million
inevitable that it will need to pursue people in just 12 years. As illustrated
systematic urbanization. in Figure 1 below, the
And in doing so, the In effect, China’s migrants need gap between the de facto
government will also to become full urban residents. urban population and the
have to allow migrant urban hukou population—
workers who have left rural areas for that is, the floating population—has
cities to become genuine urban citizens. widened since the 1980s, a trend that
is far from ideal. If this trend continues,
Such a policy change will involve much it would not be a surprise if China’s
more than simply altering a citizen’s floating population reaches as high as
hukou category from rural to urban 300 million in ten years.3 And the fact
in the registration record. Rather, it is, “second-class” citizenship of such
means allowing migrant workers to magnitude will be a big threat to social
gain permanent residency in Chinese stability in China.
cities, and thus to be covered by
the urban public service system in The challenge for China’s policymakers,
their place of work. In effect, China’s therefore, is to “reverse” the problem:
migrants need to become full urban if, instead, only one-third of the floating
residents. population of more than 300 million
gains middle-class spending power, this
Of course, such a major transformation will increase the middle-class consumer
cannot be achieved overnight. Instead, group in China by 100 million, almost
a workable plan that promotes half of the country’s current middle-
incremental and comprehensive hukou class population of more than 200
reform, with some breakthroughs, million. Since China’s policymakers
needs to be designed. are determined to increase the share
Achieving Comprehensive Hukou Reform in China 1
Paulson Policy Memorandum
of consumption in the economy, the the next six years, about 17 million
power of a new class of spenders of people will be granted a local urban
this magnitude cannot be ignored. hukou each year, among which the
number from the floating population
Since the natural urban population granted an urban hukou will see a
growth rate in large cities,4 among substantial increase, reaching perhaps
households with urban hukou 10 to 12 million annually. The Plan
status, is currently very low (and envisages that by 2020 the floating
has even been negative in some population as a percentage of China’s
years),5 it is difficult to imagine how total population will decline by two
China can achieve a substantial percentage points, from the current
increase in the urban middle class 17 percent down to 15 percent.6
population by relying solely on
that part of the population that is At the end of July 2014, the State
currently—and legally—registered Council released its “Opinions on
with an urban hukou. So to promote Further Promoting the Reform of
domestic demand as a growth driver, the hukou System” (hereafter “the
China must principally rely on the Opinions”), which proposes an all-
urbanization of rural migrant workers, out opening of hukou restrictions in
thus expanding the country’s middle- towns and small cities, the opening
class population. of hukou restrictions in an orderly
fashion in medium-sized cities,
How can such hukou reforms be reasonably determining conditions
implemented? for hukou registration in large cities,
and the strict control of population
In March 2014, China’s central sizes in very large cities. Differentiated
government released its “New policies for urban hukou registration
National Urbanization Plan” (hereafter were also specified.7
“the Plan”), which proposes “granting
approximately 100 million rural The Plan and the Opinions represent
migrant workers and other long-term an important first step in hukou
residents a local urban hukou” by reform, and exemplify the Chinese
2020 (see Figure 1). The priority group central government’s resolve to alter
is migrant workers with stable work the current system. The Opinions
in urban areas, but other groups are offer more clearly defined principles
included: graduates of universities for how citizens who leave their
and vocational and technical schools, permanent hukou residence to live
workers from other cities, and local in a city for half a year can gradually
population with a rural, rather than attain rights to basic public services in
urban, hukou. This means that over the city.
Achieving Comprehensive Hukou Reform in China 2
Paulson Policy Memorandum
Yet the Plan is merely a six-year This policy memorandum recommends
program, and according to the rate of that hukou reform move more quickly
change outlined in the Plan, completely and be opened more widely. The
resolving the floating population issue— memo presents a plan that builds on
that is, bringing down the floating the central government’s Plan and
population percentage to zero—will Opinions. It proposes comprehensive
probably require the work of another reform objectives, timetables, and
three or four decades. concrete measures. Moreover,
it attempts to take a longer term
Another problem with the Opinions perspective, offering a vision of how
is that it envisages little opening various aspects of reform might
of hukou registration in very large fit together, and also how to give
cities, and thus does not really meet members of the floating population
the longstanding earnest desire of expectations and hope to plan for
university graduates, professionals, a potential future. Such faster and
and entrepreneurs who do not have deeper reforms will, in fact, be
the local urban hukou to obtain one. beneficial for social stability.
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 3Paulson Policy Memorandum
Costs and Dividends of Hukou Reform
I
n considering how hukou reform an astronomical figure that China
is to be achieved, some believe obviously could not afford.
that the urbanization of migrant
workers will involve costs that the But that arithmetic is flawed because
public—or more precisely, the it simply multiplies 100,000 yuan
government—cannot bear. In fact, this by 230 million. The 100,000 yuan
point of view is comprised of various in services for granting an urban
misconceptions and blind spots. hukou to one member of the floating
population would not be spent in
In recent years, some relatively a year, but rather over a lifetime
comprehensive estimates have (approximately 40 years). That is,
concluded that the 100,000 yuan
granting an urban will be distributed
hukou to a typical over 40 years,
migrant worker which, based on a
(including his or linear distribution,
her dependents) amounts to an
will incur lifetime average of 2,500
public expenditures yuan ($400)
of approximately annually (in 2010
100,000 yuan constant prices).9
($16,287) based
on 2010 constant Photo: World Bank So if, on average, 20
prices.8 This includes the major million people are given urban hukou
public welfare benefits and services: each year, the total cost would be 50
compulsory education, cooperative billion yuan (in 2010 constant prices)
medical care, pension insurance, per year, or 0.1 percent of China’s
and other social security (such as current GDP. This ratio would increase
subsistence allowance), as well as incrementally each year—by the
costs for city management and social fifteenth year, the cost would amount
housing. to 1.5 percent of GDP—but these are
costs that China should be able to bear.
Some media reports state that if
the entire existing urban floating However, these costs represent only
population of 230 million were the public expenditures, and thus do
assigned urban hukou, the total cost not account for the public revenue
would be 23 trillion yuan ($4 trillion), that would be generated by the
Achieving Comprehensive Hukou Reform in China 4Paulson Policy Memorandum
floating population through taxes you-go system for pensions and healthcare,
and other channels of contribution. A the younger floating population’s
healthy, well-designed public services contributions to welfare could help to plug
system would be one financed by the urban public finance gap created by the
taxes of the users. In the long run, aging of an urban hukou population. Under
expenditures and revenue should this proposed reform plan, in the initial
offset one another. stage, because mainly highly educated and
higher-income groups are given hukou,
The majority of the floating population is their contributions to urban public finances
relatively young, thus the urban welfare should be even greater. In short, the public
required by them in the short term would burden from more comprehensive hukou
not be much, and would mainly consist of reform in the near term will not be as heavy
some migrants requiring social housing, as many predict.
especially after marriage. In the medium
term, the main service required by these But there is more to the case for hukou
migrants who have converted to holding reform than just the issue of public
urban hukou would spending burdens.
be public education In short, the public burden from more Although the “costs” of
for their children. The comprehensive hukou reform in the near urbanization should, of
largest expenditure, term will not be as heavy as many predict. course, be considered,
social security, the enormous economic
including pensions and healthcare, dividends of hukou reform are equally
would primarily be a cost over the longer significant.
term after 2030. So in the initial phase,
urbanized members of the floating When a migrant worker works in the
population would be net contributors, via city, the value of his or her output
taxes and other contributions, to public generated will be far more than the
finance rather than net beneficiaries. Put costs of public services. And the output
differently, if only the first 15 years of will be far in excess of the costs of
the hukou reform plan are considered, urbanization and workers’ wages. In
expenditures for urbanization will not general, if China’s floating population
be as high as some predict. Urbanized had local urban hukou, they would
members of the floating population have the right to fully participate in
will be net contributors—that is, the urban public affairs, and to enjoy what
revenue they generate would exceed other urban residents do with regard
expenditures.10 to choice of work, opportunity to play
to their own strengths, and greater
At present, the urban hukou population, security and fewer worries. These
especially in very large cities, is aging would greatly improve productivity
rapidly, and under China’s current pay-as- and boost domestic consumption
Achieving Comprehensive Hukou Reform in China 5Paulson Policy Memorandum
and demand, setting into motion and social development. This is
a virtuous “urbanization-economic different from certain urbanization
growth” cycle. in some Latin American countries,
where migrant workers enter the
Meanwhile, a recent quantitative city but cannot find a job, resulting
study by the Institute of Population in urban blight and other challenges.
and Labor Economics 11 notes that Looking at a longer time horizon,
hukou reform will result in freer human beings have progressed
movement of labor, an expansion on the path of urbanization for
of the size of the labor market, more than 200 years. Of course
more specialization of labor, and a there are problems, but overall,
substantial increase in the total factor urbanization—the transformation of
productivity of the urban economy. the rural population into an urban
This study estimates that if 17 million population—has resulted in greater
people are granted an urban hukou productivity, higher quality-of-life,
each year, the resulting economic and a more promising future for
net gains would be considerable. mankind. 12
Between 2015 and 2020, the annual
net economic gains would amount But over the past 60 years, China
to approximately 1.6 to 2 percent of has been travelling down a
GDP, equivalent to several times and somewhat different road, pursuing
up to dozens of times the costs of an “incomplete” urbanization and
urbanization over the same period. focusing too heavily on the short-
term benefits of industrialization and
There are also other indirect, hard- stressing the “costs” of urbanization,
to-quantify benefits. For instance, while ignoring the interests of rural
receiving an urban hukou will stabilize citizens as well as the long-term
the expectations of residency of a interests of China’s people as a
migrant. This will enable him or her whole. 13
to gradually transfer the unused
residential land and arable land in Presently, a major source of
rural areas, in turn, greatly improving resistance to hukou reform is local
the utilization efficiency of such land governments. Local governments,
for production and residence. This is fixated on expanding business (since
especially important for China, where enterprise taxes are a major source
land is scarce. of local finances) and pursuing short-
term boosts to GDP, view the welfare
This is also the logic behind why of the floating population merely as
proper urbanization will produce a a “cost” that should be written off as
net profit and promote economic much as possible.
Achieving Comprehensive Hukou Reform in China 6Paulson Policy Memorandum
But the current hukou system (as allows local governments to legally
well as the broader urban-rural dual expropriate the land from farmers
structure) has produced a large cheaply and in turn to siphon off large
army of “second-class citizens.” They amounts of land revenue. Further,
have provided cheap labor that is and as noted above, another source
crucial to China’s continued growth of resistance to hukou reform comes
of production and GDP. However, from some who have overestimated
this approach has also generated the fiscal costs of urbanization. These
a large “debt” in terms of social sources of resistance to hukou reform
welfare. Moreover, the current system can be mitigated and managed.
Achieving Comprehensive Hukou Reform in China 7Paulson Policy Memorandum
Next Steps in Hukou Reform
C
hina’s current hukou system not population within their own country
only divides people into different would no longer exist.
classes, causing social inequality,
but is also completely incompatible Such reforms would be carried out
with the market economy that China is in two steps. The first step focuses
establishing, as the system hinders the on granting local hukou to non-local
free movement of labor and severely university graduates, professional and
reduces economic efficiency. technical personnel, and business
managers. Then, in the second step,
In setting up a market economy, China local hukou would be granted to other
also needs to simultaneously protect groups, mainly migrant laborers, in a
social equality. Eventually, China gradual and orderly manner so that
should aim to be a country where the eventually all members of the floating
population can move freely, with place population have urban hukou.
of residence and hukou registration
determined by individual choices. Such an approach is similar to China’s
current policy, but the pace of opening
As an essential component of the would be much faster. More important
workforce, members of the floating than just speed is the comprehensive
population cannot be nature of the
forever adrift. This In setting up a market economy, China proposed approach:
memo sets a concrete also needs to simultaneously protect all cities and towns
but realistic timetable social equality. should undertake
to complete hukou to open hukou
reform within 15 years: By 2030, the registration. And this is especially the
hukou issue could be resolved for all case for large cities, which should take
members of the floating population. on a greater role in the reform plan.
By 2031, hukou registration would
be completely open, so that China Hukou Reform Targets, Sequence, and
would be in the same situation as Specific Measures
the vast majority of other countries
in the world—that is, people would How might the government achieve this?
be able to move and settle down
freely throughout the country, and Rough projections show the floating
the absurd phenomenon of Chinese population will reach about 300 million
people who are legally considered by 2030. Granting urban hukous to 300
to be members of an “outside” million people over 15 years amounts
Achieving Comprehensive Hukou Reform in China 8Paulson Policy Memorandum
to covering approximately 20 million important source of human capital, major
people annually, or about twice the rate contributors to economic productivity and
in the government’s current proposal. growth, and thus should be prioritized.
In the United States, many state (and
Opening hukou registration in this way city) governments and companies
would enable the government to tackle recognize that developing a high-value
the easier cases first and difficult cases local economy requires a large number
later. For example, in the first phase of of university graduates. Retaining local
reform (2016-2020), urban hukou could graduates, attracting university graduates
be granted to more straightforward from other states with work opportunities,
cases, such as university (including and recruiting some qualified foreigners
junior college) graduates, technicians who have graduated from US universities,
(including skilled workers), and business are all important and relatively common
managers (as well as spouses and American policies. Indeed, young
children living with university graduates
them). By focusing University graduates are an important also represent a major
on these groups, source of human capital, major source of the American
the objective would contributors to economic productivity and middle class.
be to resolve the growth, and thus should be prioritized.
hukou issue for 100 But in China, due to
million people in a class of the floating hukou problems, the majority of the
population who can readily contribute more than 10 million non-local university
to economic growth in cities. graduates—such as those referred to in
Chinese as being part of an “ant tribe”
Some large cities in China already have (yizu) in very large cities—often struggle
experience with granting hukou to at the fringes of urban society. It is
university graduates and professionals. difficult, for example, for them to set
So implementation could simply be up a family and live a stable life in cities,
accelerated without much difficulty. which in turn greatly dampens their
Meanwhile, during this initial phase, morale and restricts such graduates from
planning for the next phase (2021-2030) assuming productive roles within urban
would continue. In the second phase, communities. Specifically, due to the
efforts would be focused on resolving long period of “ant tribe” status before
the hukou issue for other migrant an urban hukou can be acquired, they
groups. Such a sequence of action cannot truly join the consumer class.
should be in line with China’s financial
situation and public expectations. It is quite obvious that granting young
university graduates an urban hukou
Why begin with university graduates? would be mutually beneficial for all
Simply put, university graduates are an parties in China. Because university
Achieving Comprehensive Hukou Reform in China 9Paulson Policy Memorandum
graduates are major tax contributors to chain in its industries, large numbers
social welfare expenditure, the opening of educated, highly skilled personnel,
of hukou registration to non-local as well as technical personnel with the
university graduates so that they can ability to operate high-tech equipment,
settle should result in tangible social are urgently needed. Employers need
and economic benefits. Such measures these people and want to retain them.
for the more educated should be These are workers who can earn higher
implemented as quickly as possible. wages and also have the capacity to pay
for urban social welfare through taxes
However, until now, the requirements and other methods of contribution.
for obtaining a hukou for non-local So urbanizing them is basically also a
university graduates, such as in win-win situation for the employers and
Shanghai’s residence point-based system employees.
and Dongguan’s point-based hukou
granting system, have been set too high. Conferring urban hukou to skilled
And this has meant that the number of migrant workers will also send a strong
people newly registered annually is very message to large numbers of migrant
limited (only several hundred to several workers to learn to become skilled
thousand). workers. Put simply, this will effectively
incentivize workers who do not yet have
Relative to the more than 100,000 hukou to invest in themselves so that
non-local university graduates that live they can work towards obtaining an
in each very large Chinese city, such urban hukou in the near future. In the
measures are truly inadequate. Only long term, this will help raise the overall
Shenzhen, in the last two years, has put technical proficiency of Chinese workers
significant efforts behind hukou reform. and benefit China.
Through a point-based hukou granting
system, Shenzhen gave urban hukou to Specific measures in this category could
more than 100,000 university graduates include the following:
in 2012, and to a similarly sizeable
number in 2013. First, the central government should
clearly define the scope of the three
The key to hukou reform is to gradually groups of the floating population
lower the thresholds so that some specified above, so that local
migrant workers can be granted urban implementation can be carried out
hukou as quickly as possible. The logic accordingly. Then, each city should
and rationale for granting hukou to develop a plan to grant hukou to these
university graduates are basically also three groups over the next five years
applicable to policies for skilled migrant based on census population data,
workers. For China to move up the value supplemented by surveys and estimates.
Achieving Comprehensive Hukou Reform in China 10Paulson Policy Memorandum
The plan would be broken into annual large cities of more than 3 or 4 million,
plans for implementation. With regard and especially in very large cities of
to method of operation, the point- more than 5 million. Therefore, these
based hukou granting system currently very large cities should play a more
used in certain cities can be extended.14 substantial role in offering hukou. In
This method is relatively flexible since line with their proportion in the urban
it allows qualifications for hukou to population, these very large cities
be adjusted each year as needed. For should absorb more people and not
example, those who have resided locally close the door on hukou registration.
for many years can be given priority As a strategy to jump-start the
over newcomers. hukou reform program, China may
give precedence to opening hukou
Under this scenario, beginning in registration in the second-tier of its
2021, hukou registration would large cities (see Table 1).
basically be totally open for the three
groups named above. These three Beginning in 2021, China could then
groups are mostly concentrated in begin to turn to the hukou issue for the
Table 1. Population Growth Rates by City Size, 2000-2010
Weighted Mean (%) Median (%)
Cities Based No. of Cities 10-Year Average 10-Year Annual
on “Urban Growth Annual Growth Growth
Population” in Rate Growth Rate Rate
2000* Rate
First Tier** 4 51.8 4.3 55.0 4.5
3-6 Million 11 43.0 3.6 40.7 3.5
2-3 Million 10 38.2 3.3 37.4 3.2
1-2 Million 36 53.4 4.4 37.6 3.2
National 653 cities and 45.0 3.8 NA NA
19,410 towns
*“Urban population” refers to the de facto population in the urban areas (as defined by National
Bureau of Statistics) in the city districts of a city. Based on that definition, for example, the urban
population of Shanghai was 13.46 million in 2000 and 20.22 million in 2010. For a detailed
explanation of this definition and its usage, see Chan (2007). To maintain comparability, the
population size of some cities in 2000 has been adjusted to reflect merges of cities between
2000 and 2010. For example, the population of Foshan in 2000 includes those of Shunde,
Sanshui, and Nanhai.
**refers to Shanghai, Beijing, Guangzhou and Shenzhen.
Source: 2000 and 2010 Censuses.
Achieving Comprehensive Hukou Reform in China 11Paulson Policy Memorandum
remaining 200 million migrant laborers for obtaining a hukou. Of course, after
(and their family members). 2030, once hukou registration is open,
this condition can be lowered to three
By that time, due to the overall higher months. Specific methods of operation
education level of the population, the will still need to be further designed and
self-effort of migrant workers, as well refined over the next three or four years.
as a smaller cohort of younger people
as the population ages, the number of Opening Hukou Restrictions in Large,
unskilled workers with low education Medium-Sized, and Small Cities
levels will greatly decrease. With China’s
growing economic strength in the next Presently, the specific hukou policy
ten years, the government would be measures stipulated in the Opinions
able to put more financial resources is to “open small cities and control big
behind achieving greater social equity. cities”—that is, to lift immediately hukou
restrictions in towns and small cities, lift
In this way, favorable conditions can be hukou restrictions gradually in medium-
created for resolving sized cities, and to
the hukou issue for strictly control hukou
The fact is, after more than 30 years,
ordinary migrant China’s investments are still primarily
registration conditions
workers and providing skewed toward large cities, resulting in in large cities and
welfare to low-income their faster development. very large cities. This
workers. approach is informed
by a longstanding
In the point-based system for granting misreading that such policies represent
hukou to ordinary migrant workers, a path of “urbanization with Chinese
one year of stable employment could characteristics,” which will allow China to
be taken as a basic condition. In the avoid the “urban diseases” of blight and
beginning, due to the very large slums.
numbers of ordinary migrants in this
category, other conditions could be To the contrary, this strict policy follows
added—such as the length of time of rather than breaks from the early 1980s
residence in a given locality, education policy of “controlling the population
level, and work experience—so as to of large cities” and the outdated pre-
allow the issue to be resolved in an reform policy of controlling the growth
orderly fashion. of large cities. Such a policy is not based
on the actual pattern of population
In later stages, these conditions could migration in China.
be gradually loosened—for example,
employment and residence for six The fact is, after more than 30 years,
months could become the prerequisite China’s investments are still primarily
Achieving Comprehensive Hukou Reform in China 12Paulson Policy Memorandum
skewed toward large cities, resulting in present circumstances, the “urban
their faster development. The majority of population” (chengzhen renkou) used
the floating population has not followed by China’s National Bureau of Statistics
the official policy and moved to small in each city administrative region can
cities and towns. Instead, they moved generally represent the functional
to large cities anyway in response to job urban population.16 Table 1 displays
opportunities, even though the members the central tendencies (mean and
of this floating population have not, as a median) of population growth rates for
consequence of their choice, been able different groups of cities based on data
to receive most of the social welfare and from China’s 2000 and 2010 censuses.
services in large cities because they lack Because variations in the growth rates
urban hukou. of small cities are considerable, the
median is a better indicator than the
In recent years, hukou registration mean to show the “average” trends of
policies have already been loosened in the growth rates.
many small and medium-sized cities,
but such a loosening has not actually The data show that in the period 2000-
attracted many migrant workers. And 2010, the median growth rates of the
this is mainly because the capacity of urban population of China’s cities have
small and medium-sized cities to absorb been correlated with city size. In other
employment is limited. words, first-tier cities (China’s largest)
grew the fastest.
So there is no connection between
hukou policies and the movement of This trend is likely to continue over the
migrants. Moreover, under current next 20-30 years because agglomeration
circumstances, where local finances in very large cities will continue to be
depend primarily on land revenues, an important driving force in economic
local governments lack the capacity to development. For this reason, the key
develop small cities and towns, because to hukou reform is to open the door to
the land in those areas does not sell for hukou registration in very large cities.
a high price. It is well known that over
the last two years, many newly built The rapid growth of China’s very large
apartments in these second-tier and cities can be attributed not just to
third-tier cities have remained vacant. policy factors but also to the fact that in
China’s current phase of development,
The population statistics of China’s agglomeration economies will favor the
cities are complicated and confusing. very large cities. Agglomeration brings
Many people misunderstand them many benefits and reduces business
and make a number of errors.15 Based transaction costs, a point that has been
on my many years of research, under widely accepted by economists.17
Achieving Comprehensive Hukou Reform in China 13Paulson Policy Memorandum
In addition, many scholars studying focus on lowering unit cost through
China’s urban economy believe that economies of scale. Small cities are
the number of very large Chinese cities simply not a good choice for this.
is too few, not too many.18 China’s
expanding service industries also Ultimately, the agent for achieving
benefit greatly from agglomeration agglomeration effects should be the
economies in very large cities. These market, not the government—in other
cities are the centers of wealth words, companies and urban and rural
because they are hubs of scientific and residents, rather than government
technological development and finance. policies, should be the driver. That is,
This is yet another reason why rational because officials do not possess all the
urbanization and urban development relevant information, they do not know
promotes economic development. which companies do better in large or
small cities and thus
Agglomeration in where they should
very large cities has be located. Nor can
been an important officials know if a
driving force of certain migrant is
Chinese economic “better” situated
development over in a large or small
the last 30 years. city for the simple
And China’s urban reason that the
development will specific conditions
continue along of each individual
this road in the Photo: World Bank/Freedom House are different.
next 20 years. For example, further
development of tertiary industries In the end, such decisions should be left
will no doubt be tied to further to companies and workers themselves
agglomeration in very large cities and based on market conditions, not
a corresponding decline in some small determined by an across-the-board
cities and towns. Land in China is scarce, policy to control the population of very
so urban development will have to be of large cities and encourage migrant
high density. workers to settle in small cities.
This compact urban development model Today, very large Chinese cities such
is also more compatible with China’s as Beijing, Shanghai, and Guangzhou
pursuit of low-carbon development. experience a host of urban problems,
And to provide public services to large including serious traffic congestion and
numbers of the low-income floating housing shortages. The main reason
population, it is also necessary to for these problems is not because of
Achieving Comprehensive Hukou Reform in China 14Paulson Policy Memorandum
their large populations but because congestion in these very large cities is
of poor urban planning, ineffective the lack of consideration and provision
use of space, inequitable distribution in urban planning and supply of social
of housing (e.g., many people own services for migrants (such as housing,
multiple units), unreasonable prices for transportation, and children’s education)
public facilities,19 and other factors. over the last two to three decades. All
along, the floating population has been
There are also some who believe that treated as merely a temporary workforce.
the populations of the very large cities
have already exceeded their carrying But even if floaters are temporary
capacity, and thus more hukou cannot workers, they are still human beings
be granted there. In fact, the carrying who need to live their lives (even if
capacity of cities should not be based on their needs are modest). When the
the static capacity of natural resources floating population finally rises to
such as water. A more account for one-
important factor is the The central problem these cities face third of a city’s total
carrying capacity of is not a lack of land or water per se, population (as is
social infrastructure, but rather a huge debt in the supply of the case in Beijing,
which is ultimately social services for the migrants. Shanghai, and
a question about Guangzhou), or even
financial resources: who provides them, more than one-third (as in Shenzhen)
who uses them, and who pays for them. today, then long-term neglect naturally
yields serious problems such as
Consider, for example, that although overcrowding and congestion.
Beijing’s land area is three times as
large as Tokyo’s, Beijing’s population The central problem these cities face
is only two-thirds that of Tokyo. 20
is not a lack of land or water per se,
Beijing’s GDP is one-tenth of Tokyo’s, but rather a huge debt in the supply of
and yet Beijing’s urban problems are social services for the migrants.
far more serious than those of Tokyo.
This illustrates that natural resources It is essential, therefore, that hukou
are not the most important factor reform be carried out in all cities,
in determining the capacity of large irrespective of size, including very large
cities. In fact, high-density urban cities such as Beijing, Shanghai, and
development of very large cities Shenzhen. That is because very large
enables greater economies in using cities are the places where the majority
natural resources. of China’s floating population (including
a large number of non-local university
What turns out to be a more important graduates) is concentrated and where
factor in explaining the serious work is most readily available.
Achieving Comprehensive Hukou Reform in China 15Paulson Policy Memorandum
Ultimately, this means that very large second-tier cities enjoy the benefits
cities can make greater contributions brought about by the agglomeration
to hukou reform than is the case under economies of very large cities. And at
current government plans. Considering, the same time, they have the ability
however, that the current pressure of to accommodate and attract large
supplying public services in first-tier cities numbers of people who are immediate
are considerable—and since population targets for hukou reform.
carrying capacity cannot be drastically
expanded in the short term—launching For purposes of comparison: the urban
hukou reform in very large cities that are population in the United States is
not in the first tier could be a temporary about 250 million; the country has two
measure to help generate momentum. “megacities” (metropolitan areas with
But this would broaden current efforts a population of at least 10 million).21
beyond only medium-sized and small Japan’s urban population is 110
cities, and thus be a way of breaking million but also has two megacities.
ground on a more comprehensive The urban population in China is about
reform of the hukou system. three times that of the United States,
and can certainly accommodate six
Such very large but second-tier cities to seven megacities. But at present,
include Wuhan, Chongqing, Chengdu, there are only four.
Xi’an, Dalian, and Zhengzhou. These
Achieving Comprehensive Hukou Reform in China 16Paulson Policy Memorandum
Other Supporting Measures
H
ukou reform is a large-scale, and coordinating national hukou
highly complex project, which policies, integrating specific measures
requires coordination among across provincial lines, actively
many different components and promoting reform and supervising
agencies of government. implementation, and developing
regulatory mechanisms in a timely
Role of the Central Government fashion.
Since hukou reform requires a Hukou reform requires breaking
comprehensive development through the limitations imposed by
strategy, strong leadership and regional administrative boundaries
overall coordination from the so that migrant workers from one
central government are needed. For province can obtain hukou across
instance, the further provincial lines when
development of Since hukou reform requires a they move. A large set
China’s economy will comprehensive development of the current issues
depend on having a strategy, strong leadership and involved with granting
single domestic labor overall coordination from the hukou to the floating
market and consumer central government are needed. population is about
market. And the general social welfare
task of establishing the underlying (such as public housing, education,
conditions for a unified, free domestic social security, and land). Another set
market is clearly a responsibility of the is about the sharing of fiscal resources
central government. And hukou reform and responsibilities between the
is pivotal to this. central government and local
governments. These two sets of issues
Again for purposes of comparison, urgently need the leadership of the
consider the United States. The central government.
strength of the American economy
has depended, for more than a Indeed, this challenge will only grow
century, on the federal government’s as China continues to develop its
efforts to combat local economic market economy with increased labor
protectionism and create a domestic mobility. Hukou reform will inevitably
market in the United States within need to take place across multiple
which both labor and capital can flow localities, involving the complicated
freely. Applying this logic to China, issue of sharing responsibilities and
the central government would need authorities among different local
to play a strong role in promoting governments.
Achieving Comprehensive Hukou Reform in China 17Paulson Policy Memorandum
The central government should The other part of social services
establish a hukou reform governing involves mostly local services, which
body. This may be a sub-agency of the can be mainly financed through local
National Development and Reform taxes on households, such as income,
Commission (NDRC) and would have sales, and property taxes. These should
the power and responsibility to be expanded in China to generate
specifically focus on implementating more revenue, so that those receiving
hukou reforms. services will also contribute to local
revenue streams. For example, the
Adjusting Local Tax Structure property tax pilot program currently
being carried out in two cities,
Local governments are a major source Shanghai and Chongqing, can be
of resistance to hukou reform, quite expanded to many more.
simply because the burden of paying
for social services has primarily fallen Over the next twenty years, the
on them. China’s local governments majority of China’s floating population
depend principally on enterprise will become new members of the
taxes, land sales, and debt finance urban workforce, consumers, and
(often through unofficial local finance homebuyers, so they will also become
vehicles). In short, local governments new sources of income, sales, and
have not established a sustainable property tax revenue. The crux of
municipal finance system that is local tax reform is to create a tax base
commensurate with population growth that grows with population. This way,
and a market economy.22 expenditures on social services and
revenues can expand in parallel to
Despite the rapid pace of China’s achieve fiscal sustainability at the local
urban development, large numbers of level.
migrants have been excluded from the
urban social services system. To keep Reform of the Agricultural Land
pace with granting hukou to migrants, Transfer System
then, spending on local social services
would need to be increased, which Further urbanization in China will
requires matching revenues. definitely require an increase in urban
land, and this, in turn, will primarily
As examined above, some social be achieved by converting agricultural
services involve general social welfare, land to non-agricultural use.
such as compulsory education and
retirement security. These would be After members of the rural population
best financed through fiscal transfers at move to the urban areas, the
the national or provincial level. agricultural land they leave behind
Achieving Comprehensive Hukou Reform in China 18Paulson Policy Memorandum
should be transferred to increase This measure could be more easily
utilization efficiency. But in today’s China, implemented in developed areas, where
such transfers, and especially transfers the rural population can benefit from the
into the market, present complicated protection of a better developed legal
issues of how to distribute revenue from system and a greater general awareness
land value appreciation and protect of their rights. But in less developed
the interests of the rural population. rural areas, due to their inadequate
Indeed, there are inherent defects in legal system, it would be hard to ensure
China’s existing rural land property rights reasonable compensation for rural land
arrangements, mainly the ambiguity of transfer. Once members of the rural
collective ownership, which easily lends population lose their land, it can mean
itself to abuse. forfeiting their
livelihood, posing
It was decided at serious financial risks
the Third Plenum of to themselves and
the 17th Congress society.
of the Chinese
Communist Party In the next stage of
in 2008 that China reform, then, China
would gradually will need to turn to
develop a unified the question of how
rural-urban land fair compensation
market. This Photo: World Bank and protection can
was reaffirmed at the Third Plenum be provided after members of the rural
of the 18th Congress of the Chinese population leave their land. This will be a
Communist Party in 2013. The latter critical issue in rural land reform.
Plenum further stipulated that collective
construction land could enter the Establishing a Unified Urban and Rural
market. Social Welfare System
But how should “collective land” be The basic problem of inequality of
defined? There is widespread debate and social services and opportunity created
discussion of this issue in China, but the by the hukou system lies in the urban-
general consensus has been to reform the rural dual social structure set up in the
current rural land expropriation system to 1950s. To solve this problem, China
allow the rural population to put collective needs to reestablish a unified society
construction land into the market. This such that every citizen would have equal
should result in the same rights and prices and reasonable access to social goods,
for urban and rural land, hence protecting including public education for children
the interests of the rural population. in cities where their parents work.
Achieving Comprehensive Hukou Reform in China 19Paulson Policy Memorandum
Currently, citizens of China’s large cities right to move anywhere in the country
enjoy better public welfare and services. for work or business, or to be with
And that is precisely why large-city their children. One would only need to
hukou carry more value. Since very stay for three months (or six months)
large cities have first-class education, to qualify for a local hukou. Under that
healthcare, and other resources, as well condition, the freedom for individuals
as very high college admission rates, it to change their place of residence in
is no surprise that so many Chinese, no accordance with changes in family life
matter where they are born, want to cycle or in employment would be greatly
obtain hukou in these cities. expanded. Only in this way can China
develop a productive economy that
Rebalancing basic public services so that allocates human resources efficiently.
comparable services exist more equally And China would also be a fairer society
in different locations, including smaller characterized by relatively equitable
cities, will change incentives to migrate. opportunity.
Put differently: if the welfare, education,
and healthcare services available in The Opinions has already outlined some
small cities are also improved, some of the related and subsidiary measures
migrants may be willing to move there for a comprehensive hukou reform.
instead of going to the biggest cities. These include developing a nationwide,
For instance, it is conceivable that some unified basic pension insurance system
retirees may find it attractive to go to for both urban and rural residents; a
small cities because of lower housing unified medical assistance system; the
prices and better air quality, instead of protection of equal education rights
crowding into China’s big cities. for migrant children; and a nationwide,
unified hukou system for both urban and
Under a unified rural-urban social rural areas. These are important first
welfare system, people would have the steps, but they aren’t sufficient.
Achieving Comprehensive Hukou Reform in China 20Paulson Policy Memorandum
Conclusion
T
his policy memorandum population) can be used as an
provides a preliminary sketch indicator of overall progress toward
of the objectives, principles, comprehensive hukou reform. China’s
and steps needed for comprehensive central government has already
hukou reform. To be sure, many resolved to undertake comprehensive
specific technical details must be hukou reform but the pace remains
worked out. But through a gradual too slow.
yet still comprehensive approach,
the vicious trend of an increasing To summarize: This memo proposes
gap between the urban resident a two-step hukou reform. The first
population and the official urban step is to take a groundbreaking
hukou population could be reversed. leap forward and commit to resolve
the hukou issue
China’s central Through a more comprehensive hukou within five years for
government has well reform, the urban floating population the three groups
recognized the hukou can be converted into a productive mentioned above
problem. Yet it needs resource for China’s economic future. (most notably
to have a roadmap university graduates),
that gets the two populations to by opening the hukou door in China’s
converge over, say, 15 years, thus very large cities, but especially its
becoming a more unified and true second-tier ones. In the second step,
urban population. after 2020, the government would
move on to resolve the hukou issue for
As in other countries, citizens other groups.
anywhere in China should ultimately
no longer be classified as “having To date, China has spent almost
a hukou” or “not having a hukou,” two decades in talking about hukou
but should be able to enjoy what reform, but little has been achieved.
former Premier Wen Jiabao, in his There is no time to waste. If hukou
2013 report to China’s National reform is successful, both the urban
People’s Congress, called “freedom of floating population and China as a
movement and a satisfactory way of whole will benefit. Through a more
life for all citizens.” 23 comprehensive hukou reform, the
urban floating population can be
From 2016 to 2030, each year’s converted into a productive resource
difference between the urban for China’s economic future—an
resident population and the urban engine that powers the next round of
hukou population (or the floating the country’s economic development.
Achieving Comprehensive Hukou Reform in China 21Paulson Policy Memorandum
Affirmative movement toward the “economic miracle,” but also establish
complete abolition of the class a fairer society and a modern nation.
differences brought about by the That is critical if China is to realize
hukou system will not only pay what President Xi Jinping has termed
dividends for China’s economy the “Chinese dream.”
and help perpetuate the Chinese
Achieving Comprehensive Hukou Reform in China 22Paulson Policy Memorandum
Endnotes
1
Chan, Kam Wing, 2012. “Crossing the 50 Percent Population Rubicon: Can China Urbanize to Prosperity?”
Eurasian Geography and Economics, Vo1.53, No.1, pp.63-86.
2
Estimates based on China’s Population Census in 2010.
3
Chan, Kam Wing, 2013. “An Investigation of the Path to Hukou Reform,” ed. Cai Fang, Reports on China’s
Population and Labor, No. 14, pp. 111-125.
4
In this memo “large city” generally refers to a city with a population of more than one million, and
includes “very large cities” (those with a population of more than five million). The State Council recently
refered to a “very large city” as a city with an urban population of more than five million (State Council,
“Opinions on Further Promoting the Reform of the Hukou System,” July 30, 2014).
5
Xie Lingli, Lu Gui, 2008. Population Development in Shanghai Toward an International Metropolis (in
Chinese), Shanghai People’s Publishing House. Beijing – 60 Years, 1949-2009 (in Chinese), China Statistics
Press, 2010, Table 5-4.
6
“National New-type Urbanization Plan,” State Council. March 17, 2014. http://www.gov.cn/zhengce/
2014-03/16/content_2640075.htm.
7
“Opinions on Further Promoting the Reform of the Hukou System,” State Council, July 30, 2014.
8
These estimates come from the following Chinese sources: Investigation Group of the Ministry of
Construction, 2006, “New Demands on Cities as a Result of Migration,” Research Report on Chinese
Migrant Workers, China Yanshi Press. Chinese Academy of Sciences, Sustainable Development Strategy
Study Group, 2005, “China Sustainable Development Strategy Report,” Beijing: Science Press, 2005. Zhang
Guosheng, “The Urbanization of Migrant Workers Based on Social Cost Considerations: Perspectives and
Policy Choices for a Developing Country in Transition,” China Soft Science, 2009, no. 4. China Development
Research Foundation, 2010, “China Development Report 2010: China’s New Urban Strategy of Promoting
Human Development.” Development Research Center of the State Council, 2011, Urbanization of Migrant
Workers, China Development Press.
9
This figure is very close to the annual per capita cost of urban public services (2,211 yuan) estimated by
Qu Xiaobo and Cheng Jie using municipal fiscal data. Refer to: Qu Xiaobo and Cheng Jie, “Estimates of Cost
of Hukou Reform,” Forum on Urbanization of Migrant Workers and Higher-Quality Urbanization, Beijing,
Aug. 16, 2013. For detailed analysis refer to: Chan, Kam Wing, 2013. “An Investigation of the Path to Hukou
Reform” (in Chinese), ed. Cai Fang, Report on China’s Population and Labor, No. 14, pp. 111-125. Assuming
Achieving Comprehensive Hukou Reform in ChinaPaulson Policy Memorandum
an interest rate of 3%, the annual average will be 4,200 yuan. However, as a ratio of GDP, the ratio would
be about the same when GDP grows at the same rate as the discount rate. Since GDP would likely grow
faster than the discount rate, the ratio will likely decline over time.
10
The logic of the abovementioned analysis is similar to what is used in the U.S. Congressional Budget
Office (CBO) analysis of revenues and expenditures that would result from legalizing undocumented
immigrants. One can expect that, at least over the first two decades of granting hukou to the floating
population would result in a net inflow of revenues to the public coffer, rather than a net outflow. See
“CBO: Immigration Bill Would Profit U.S.,” The Seattle Times, June 16, 2013.
Du Yang, Cai Fang, Qu Xiaobo, Cheng Jie, 2014. “The Continuation of the Chinese Miracle: Harvesting
11
Dividends from Reform of the Hukou System” (in Chinese), Economic Research, No. 8, pp. 4-13.
Edward Glaeser provides an insightful discussion on this topic; refer to: Triumph of the City, Penguin
12
Books, 2011.
Chan, Kam Wing, “China Should Proceed Along Normal Path of Urbanization” (in Chinese), Caixin, 2010-
13
12-8, http://policy.caing.com/2010-12-08/100205422.html.
14
At present some cities employ a “residence certificate,” as a “preparatory” hukou for those who do
not yet have a local hukou, and is functionally similar to a hukou. In view of simplifying the application
procedures and complexity of the hukou system, this memo does not recommend using the “residence
certificate”. This will save time and reduce opportunity for rent-seeking.
15
Chan, Kam Wing, 2010. “China’s Current Urban Population Statistical Issues and Their Impact on
Economic Analysis” (in Chinese), ed. Cai Fang, Report on China’s Population and Labor, No. 11 – Labor
Market Challenges in the Post-Financial Crisis Period, pp. 236-247.
16
Chan, Kam Wing, 2007. “Misconceptions and Complexities in the Study of China’s Cities: Definitions,
Statistics, and Implications,” Eurasian Geography and Economics, 48(4), pp.383-412.
Wang Xiaolu, 2010. “Developing Large Cities is Imperative” (in Chinese), China Reform, No. 10, http://
17
www.caing.com/2011-01-07/100214829.html.
18
For example: Henderson, Vernon, 2009. “Urbanization in China: Policy Issues and Options,” Report for
the China Economic Research and Advisory Program. Chan, Kam Wing, 2010. “Fundamentals of China’s
Urbanization and Policy,” The China Review, Vol. 10, No.1, pp.63-94.
19
For example, a ride on Beijing’s subway only costs 2 yuan regardless of distance, which is tantamount to
a free ride.
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