What Is Hukou and Why China Is Creating Mega-Cities: QuickTake

(Bloomberg) -- People in China have for decades faced serious hurdles when trying to relocate around the country, whether to find a new job or a better school. One is known as hukou (pronounced who-co) -- a government system that registers every household and determines where people can live, work, go to school and claim benefits. There’s a growing consensus, however, that it may be holding the economy back. President Xi Jinping, who argued for abolishing the hukou in his doctoral thesis, has made overhauling it part of a strategy to boost growth by having more Chinese living in big city clusters.

1. What is hukou?

Physically it’s a small maroon passbook that serves as a sort of internal passport, containing information on marriages, divorces, births and deaths in a household, as well as the city or village to which each person belongs. Such benefits as health care, a pension and free education are more easily accessed if a person lives where he or she is registered. Not having the proper hukou makes it more difficult to buy a house or a car. The system was set up in 1958, at the start of the Great Leap Forward, to enable the Communist Party to control the movement of China’s vast population in support of its twin policies of farm collectivization and rapid industrialization.

2. How is it working?

Not that well, or maybe too well. Shanghai, Beijing, and Shenzhen became magnets for enterprising Chinese in recent years despite the hukou system’s constraints. By some estimates as much as 40% of the population of Shanghai hasn’t been granted a hukou by the city. In Beijing it’s more than a third and in Shenzhen, almost twice that. On the other hand, the hukou system seems to have served as a brake on general urbanization. While China’s rate has climbed from about 20% in the 1960s to a little under 60% by the end of 2018, that’s below the 66% average for upper-middle-income economies, which is how the World Bank categorizes China. It’s also a long way from the 81% norm for high-income economies.

3. Why is that problematic?

Restricting labor mobility can put a damper on the economy, which has been growing at its slowest pace in decades. Many of the migrants are low-income workers who live a precarious existence in cities far from their families and home villages. The system also helps to institutionalize a yawning gap in living standards between rural and urban residents.

4. What’s the new strategy?

The State Council, China’s cabinet, pledged in late December to eliminate the system in cities with fewer than 3 million residents and relax it in those with 3 million to 5 million. (Out of almost 300 prefecture-level cities in China, only 27 exceed 3 million people, according to I-City Media.) For larger cities such as Beijing and Shanghai, the system will be simplified, it said, without giving details. Meanwhile, President Xi, in an article published that same month, touted the importance of developing so-called city clusters and allowing further concentration of industry and population in certain regions. The goal: to grant more than 100 million rural residents hukou in cities by the end of 2020.”

5. Potential benefits?

A Morgan Stanley report predicted China’s “Urbanization 2.0” strategy, which also includes greater regional coordination and enhanced infrastructure, would fuel growth and allow China to double its per-capita income by 2030. Qian Wan of Bloomberg Economics said the proposed changes also may help counteract the economic drag from a vanishing demographic dividend. China’s working-age population — people from 15 to 59 — has been shrinking since 2015, so the country needs to lift productivity. Measures that promote a better allocation of labor are one way to do that. The moves are also expected to spur home sales. An index tracking shares of Chinese property developers rose 2.9% the day after the State Council statement was published.

6. Hurdles?

The pace of change will ultimately be decided by authorities in individual municipalities, many of which either lack the resources to expand public services to support larger populations or aren’t inclined to make the necessary investments. Local officials in Beijing and Shanghai fear that enfranchising the millions living there without hukou would be costly and could bring fresh waves of migrants to their gates.

7. Any early experiments?

In 2017, Beijing instituted a points system to determine who gets a hukou, taking into account factors such as age, education and how many years one has paid taxes to the city. In 2019, 6,007 people made the cut, out of 100,000 applicants. Since September, about 30 cities have eased some requirements. Hangzhou, capital of affluent Zhejiang province, and Xi’an, the capital of Shaanxi province, now offer permanent residency to migrants with college degrees. Yichang, a city of 4 million people that’s facing a population decline, said anyone able to rent an apartment would qualify for a hukou. The Guangxi Zhuang Autonomous Region in southern China removed all barriers for rural residents applying for urban residency -- and said they could retain rights to their farmland.

The Reference Shelf

• A Morgan Stanley’s take on China’s Urbanization 2.0.
• Xi’s article in Quishi magazine.
• Bloomberg Opinion’s Conor Sen thinks China could use a little suburban sprawl.
• Bloomberg Businessweek explores the issue of residency rules further.
• Deeper dives into China’s wealth gap and anti-poverty efforts.

To contact Bloomberg News staff for this story: Sharon Chen in Beijing at schen462@bloomberg.net;Dandan Li in Beijing at dli395@bloomberg.net

To contact the editors responsible for this story: John Liu at jliu42@bloomberg.net, Paul Geitner, James Mayger

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With assistance from Bloomberg