China going nowhere on hukou reform

19 May 2017 /  Bingqin Li / East Asia Forum

China’s hukou (household registration) system is often criticised for hindering the free movement of labour and creating inequality. In recent years the hukou system has undergone considerable reform. But is this enough to turn around the trends in China’s regional inequality?

In essence, hukou is a population recording system that the government uses to budget for social provisions. The differential treatment associated with different hukou statuses has implications for public finance and social insurance. Funding sources are organised locally by provinces or by cities depending on the type of services or benefits.

In 2003, China ended the practice of evicting migrants not registered with the proper hukou status by force. But since then, the social welfare benefits given to hukou migrants have been gradually reduced.

Before 2014, most social security coverage was linked to one’s hukou status, which meant that even if migrant workers had paid taxes in cities, they were not able to gain access to public services and welfare coverage there. For the labour exporting provinces — which are often less developed — migrant workers did not pay tax locally, but came back to access social welfare coverage. In this sense, not only did the poorer parts of the country suffer from brain drain, they also subsidised the richer regions by paying for the welfare and social services of the migrant labour force.

For years, governments in the underdeveloped areas complained about this unfair treatment and called for ‘top-level design’, by which they meant introducing a unified social insurance system nationwide. But this is easier said than done.

Income and living costs vary greatly across different regions. The gap can be big even between urban centres and peri-urban areas, not to mention between richer cities and poorer rural areas nationwide. In China, it is technically impossible to design a universal pension system with the same level of benefits throughout the nation. As a compromise, some large cities such as Shanghai and Guangzhou introduced layered social security contribution and entitlement systems, through which migrants holding rural household registration can contribute less and claim less.

Under the 2014 reform these options do not have to be defined according to hukou status and all residents can choose from different social security packages. Across provincial boundaries there is a growing understanding that there is no need to develop a single nationwide social insurance scheme. A portable welfare contribution record and an entitlement arrangement across regions, which does not trap the hard-earned money of migrants, are more realistic.

The pre-2014 hukou system merely reinforced policy biases in favour of cities against villages, coastal areas against inland areas, and larger cities against smaller cities. Social services such as education and medical care have become concentrated in larger urban centres. Rural and remote areas and even smaller urban centres do not have all the basic social services that people in large cities would expect.

Such gaps make large cities attractive to migrants who want to get the same opportunities for themselves or for their children. Fast increases in population has driven up house prices across cities in China. But people’s impression is that it is a lot easier to accumulate wealth in larger cities. As a result, more people want to move into these large cities in the hope that they can benefit from the better lifestyle, accumulate wealth quickly and create a better life for their children. Read more…

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