Last updated: 19:53 / Monday, 11 August 2014
Sinology, Matthews Asia

Hukou Reform: An Important Progress to Reduce Social Instability in China

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Hukou Reform: An Important Progress to Reduce Social Instability in China
  • The reform is an important first step toward reducing the contradictions and conflicts in Chinese society
  • Hukou reform should also boost consumption and raise manufacturing productivity
  • Ending the current hukou restrictions should result in higher productivityin manufacturing and construction by reducing worker turnover

Last week’s announcement that the Communist Party will reform the hukou, or household registration system, is an important first step toward reducing the contradictions and conflicts in Chinese society. According to Andy Rothman, Investment Strategist at Matthews Asia, hukou reform should also boost consumption and raise manufacturing productivity. In the most recent post of “Sinology”, an investment blog authored by Rothman, he explains what is a hukou, its purpose and the implications of this relevant reform.

Historically, the hukou system served several purposes for Mao. First, it restricted movement within the country. People born in rural areas received an agricultural hukou, which we will refer to as a rural hukou, while those born in cities received a non-agricultural hukou, which we will refer to as an urban hukou. It was very difficult for most Chinese to change their hukou designation, and for those holding a rural hukou, it was almost impossible to move to a city.

China’s Communist Party used the hukou system in support of the planned economy. In the late 1950s, about 85% of the population was rural, and the Party wanted peasants to remain in the countryside, to grow the grain and raise the animals necessary to feed the smaller urban population that was going to establish China’s new industrial economy. The rural population was also expected to be largely self-reliant and was given access to land for farming, but few other benefits.

Holders of urban hukous, in contrast, were assigned a job (there were no private firms) and provided housing, education, health care and pension benefits. Grain was rationed until 1992 and only urban hukou holders received ration coupons, which limited both the cost to the government and the ability of rural hukou holders to survive in the city.

Why hukou reform now?

Over the past decade, the Party often acknowledged the need to reduce formal discrimination against migrant workers and proposed some reforms, but there was very little progress.

Over the past year, however, the Party leadership appears to have recognized the risks of continuing to discriminate against a segment of the population, which is both large and vital to economic growth. Pressure to act has been growing: as migrant workers shift from being a “floating” to a more permanent urban population, they increasingly expect better non-wage benefits, including social-security coverage and other urban social entitlements such as free education and social housing that historically have been available only to workers with urban hukous.

The new plan

After more than a year of debate and planning, last week the Party leadership launched its program for hukou reform. Little details were released, but Rothman expects the program to focus initially on migrant workers who are living with their family members in smaller cities, and the government announced a target of providing urban status to 100 million people by 2020.

Three key benefits

Matthews Asia anticipates the following benefits from implementation of the hukou reform program:

  • Reducing social instability risks. Launching a complex and expensive reform program is a sign that the new Party leadership is willing to take on big challenges. Hukou reform will also reduce the risk of social instability from the 234 million people living in cities who face de jure discrimination on a daily basis, particularly due to their ineligibility for social services and subsidized housing.
  • Boosts to labor supply and consumption. Reform of the hukou system may increase the supply of migrant workers in cities at a time when the overall labor force is shrinking, and should improve consumptionby strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.
  • Productivity gains. Ending the current hukou restrictions should result in higher productivityin manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. One example of gains from converting temporary labor to permanent staff may illustrate the potential improvements that could result from lower turnover. A multinational company with large China operations told us last year that when they switched from temporary to permanent contract workers, their costs per unit rose by 4.5%, but output per worker rose 27%, accidents were down by half, and consumer complaints attributable to operations fell 30%.

You may access the full article, authored by Andy Rothman, through this link.

Andy Rothman is Investment Strategist at Matthews Asia.

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