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Feb 28, 2013 | 11:30 GMT

Reforming Hukou: China's Quest for Inland Urbanization, Part 3

Reforming Hukou: China's Quest for Inland Urbanization

Editor's Note: This is the third part of a three-part series on China's household registration system and its effects on the country's labor force and economy. Part 1 explained the origin of the system; Part 2 discussed the role of the system during the Mao era and after China's economic opening; and Part 3 examines how the Communist Party of China will use the system to support its push for inland development.

Over the past five years, China's central government has shifted the focus of domestic macroeconomic and development policy from the coast to the interior. After more than two decades of extensive investment into coastal urban and transport infrastructure built to support the export-oriented manufacturing sector, Beijing now seeks to transform China's large, populous and heavily agricultural interior into a new industrial base to supplement, if not entirely replace, the coast.

The push to develop the interior comes at a time of tremendous stress and uncertainty for Beijing. China is at the end of an economic growth cycle that has underpinned regime stability for more than 20 years. That cycle operated according to a particular geopolitical logic, strongly favoring coastal development at the direct expense of the interior. As China's incoming leaders are no doubt aware, it has produced regional imbalances that could undermine the Communist Party's hold on power if left unaddressed.

Beijing understands that maintaining control will ultimately require that it do what no prior dynasty has done: build a genuinely unified national economy. Doing so will require shifting more of China's 600-700 million farmers and more of its 250 million migrant laborers to cities in the interior. Unless or until that economic unity and integration is realized, China's long-term political unity will remain elusive, contingent on the central government's ability to enforce its will over regions that have their own interests in mind.

Hukou as an Impediment to Integration

The hukou system today is a core obstacle to long-term national economic integration. It provides a legal framework and rationale for what is effectively a state-imposed caste system. As a result, it perpetuates many of China's most fundamental social and economic divisions — between rural and urban areas, coast and interior, rich and poor. Nonetheless, for the foreseeable future, genuine reform of the hukou system — understood as widespread relaxation of controls on population movement, or even abolition of rural/urban and local/nonlocal classifications — is unlikely. Rather, as Beijing pushes urbanization of the interior, it will most likely use the hukou system much as Communist Party leaders in the early 1950s did: to actively direct the movement of labor to inland cities. Beijing will present this as hukou "reform" when in fact it is hukou manipulation.

In urbanizing the interior Beijing faces a dilemma. It must make second- and third-tier inland cities attractive alternatives to established coastal industrial hubs, not only for low-skilled workers currently on the coast (some portion of whom Beijing hopes to return inland as low-end manufacturing on the coast slows) but also for agricultural hukou holders currently living in their registered inland provinces.

This will not necessarily be easy for either group. After more than 20 years of continuous labor migration from the interior to the coast, migrant laborers living in coastal cities have built strong regional ties and communication networks. These networks play an important role in stabilizing and cementing current labor migration patterns. For example, it is common for certain coastal factories, or even entire towns and parts of coastal cities, to be populated largely by migrants from a single town or region of a single inland province.

General Migration Patterns in China

General Migration Patterns in China

Reversing or redirecting migration patterns back toward the interior will require creating an incentive structure in inland cities strong enough to overwhelm existing communal ties and communication networks. This challenge is compounded by the even more basic fact that many migrants simply do not want to return to the interior, which they associate with limited opportunity for upward social and economic mobility, and would much rather stay in coastal cities even if official employment is scarce and access to social benefits limited.

At the same time, Beijing will struggle to shift agricultural hukou holders into cities. One side effect of the extensive state-led investment into the interior over the past five years has been an astronomical rise in the value of land in and around cities, both coastal and inland. This in many ways pits municipal governments, which derive most of their revenue from land sales and thus have a strong interest in absorbing new land in surrounding rural areas, directly and sometimes violently against holders of agricultural hukou, who legally own the land they farm. (This is one of the central government's few concessions to rural hukou holders.) As land values rise, agricultural hukou holders have less incentive to give their land over to local governments in exchange for urban hukou, especially when that hukou is attached to a second- or third-tier provincial city with only mediocre schools, hospitals and other social services unlike Shanghai or Beijing, where the benefits of a local hukou are tangible and potentially huge.

In the past, it was not uncommon for municipal governments, with provincial or central government backing, to forcibly urbanize rural populations under the pretext of eminent domain, thereby gaining control of their land in exchange for a poorly built apartment and paltry social services. But this is fast becoming an unviable approach as protests over land expropriation rise in frequency and intensity. Already in the first months of 2013, several local governments in coastal Chinese provinces have proposed measures to better protect the land transfer rights of agricultural hukou holders.

Other Challenges to Inland Urbanization

If the central government hopes to increase urbanization in the interior without simply recreating the same imbalances that hampered the previous coastal-based economic growth model by siphoning all resources and labor to a handful of key inland cities, it will have to work with provincial and municipal governments to create a far stronger incentive structure in lower-level inland towns and cities.

That means improving the quality and consistency of access to education, healthcare, jobs and urban amenities across regions and provinces. In many respects, this is exactly what most of China's inland cities are trying to do. But it requires cash, and aside from land sales, municipal governments' only other major revenue stream is credit from state-owned banks. (In most cases, more than two-thirds of local government tax revenue goes to the central government.) Land sales are an inherently fragile financial foundation, not only because they create friction between municipal government and rural landholders, but also because they depend on a continual expansion of the real estate sector.

However, access to state-backed credit has limits, which became clear after Beijing reduced its lending to local governments in 2011-2012. Perhaps the single biggest obstacle to urbanization is the fact that China's central government has no plan for how municipal governments are to fund the expanded urban social services that theoretically would attract and support new urban workers, either from rural areas or returning migrant laborers. Unless local governments are able to break their dependence on credit and property markets, it will be difficult for them to support larger, more prosperous populations. Breaking that dependence will probably require a significant shift in the financial relationship between local and central governments — a process that could, in turn, significantly reduce the central government's influence over localities and regions. 

Over the past 20 years, the Communist Party has constructed a political economic system of extraordinary complexity, in which every element appears equally foundational and intimately tied to all the others. China's historical cycles of dynastic rise, expansion, decline and collapse suggest that the pattern continues and will play out once again unless the country is able to reduce the rural-urban and coastal-interior imbalances that have traditionally proved so problematic.

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