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Chinese Urbanization Put on Hold

John Lee

The communique released after last week’s conclusion of the annual Central Economic Work Conference, reportedly the most important gathering for deciding economic policy in China, made for dry reading. Most of it dealing with balanced growth and controlling inflation was predictable.

But one section stood out: Beijing will gradually relax the “hukou” or household registration system. This, in theory, will eventually allow many rural Chinese citizens an opportunity to seek a better life in the city—not just speeding up the rate of poverty alleviation but giving domestic demand in China a much needed shot in the arm. But there is little joy ahead for the hundreds of millions of China’s rural poor. In reality, greater opportunities will still elude the vast majority of those dreaming about a better life in the bright lights of one of China’s sprawling cities.

First things first: why do so many China watchers and economists become exited when there is talk of relaxing the hukou system? Contrary to popular belief, the Chinese economy is far from being a free market one. Land, capital and especially labor is still controlled and regulated by the Chinese Communist Party. True, hundreds of millions of rural residents have tried their luck in China’s sprawling cities.

But even for rural Chinese working in urban areas, their rights are severely restricted. For example, they need temporary visas to live and work in urban centers which can be annulled at the whim of city officials. They cannot purchase long-term leases for land. Having the misfortune of being born in rural China, they cannot build the better life that their urban counterparts are enjoying.

This is why any possible relaxation of the hukou system is exciting. One of the great stories behind China’s spectacular growth has been the pace of urbanization that has occurred. When reforms started in 1979, less than 5 percent of the population lived in cities. It is now 45 percent. More importantly, since the early 1990s, wealth is increasingly concentrated in urban China.

For example, the average income of urban citizens compared to rural counterparts increased from 1.5:1 in the 1980s to 2:1 in the mid-1990s and is currently at around 3.5-4:1. Urban-rural inequality in China took off after previous President Jiang Zemin hatched up a model that grew increasingly reliant on state-led urban development; something that current President Hu Jintao has persisted with.

In contrast, while the lion’s share of the country’s capital is destined for state-controlled businesses in urban China, growth in rural business income from the 1990s onwards is actually half what it was in the 1980s. Worryingly, World Bank studies indicate that almost half of all China’s rural residents have seen their net incomes stagnate or decline since 2000. Poverty and illiteracy in rural China has actually doubled over the same period. It is no wonder that hundreds of millions of rural Chinese dream about a better life in the city.

The solution therefore appears simple: relaxing the hukou system and allowing greater freedom of movement from rural to urban China will speed up the country’s rate of urbanization. This, in turn, ought to increase opportunities for many more of China’s 800 million rural citizens. But there are two reasons why relief for China’s rural poor might not yet be at hand.

First, any possible relaxation of hukou rules—if it occurs at all—will only likely apply to existing migrant workers in Chinese cities. Importantly, the implementation of any new rules will be the responsibility of the same local city officials that regularly abuse or ignore even the limited rights of the existing migrants.

Second, the narrative of the Chinese people growing richer on the back of rapid urbanization ignores important on-the-ground realities. For example, although many focus on urban-rural inequality within China, far too few realize that inequality within major cities in China such as Shanghai is actually at least as bad as overall urban-rural inequality comparisons.

Indeed, the bottom-line GDP figures for major industrialized cities in China are misleading when it comes to the prosperity of the ordinary urban resident because so much of the wealth and profits are generated and retain by the state-controlled corporate sector, rather than by individual urban citizens. The result is that a relatively small cohort of well-connected insiders benefit while the actual disposable incomes of most of the urban residents have been growing at less than a third of the city’s overall GDP growth.

This means that the hope of a better life for the hundreds of millions of Chinese rural residents might not lie in moving to cities. Furthermore, even though the state-controlled sector in urban China receives over three-quarters of the country’s capital, studies suggest that the state sector is three to four times less efficient at generating jobs than their private sector counterparts. In other words, China’s state-led model cannot generate anywhere near the number of jobs required to keep any constant inflow of rural residents to cities employed.

Internal memos and reports show that the CCP has known this for a while. In fact, one of the reasons why the hukou system has never been relaxed is that the prospect of urban unrest grows exponentially when tens of millions of unemployed rural Chinese roam the cities with unfulfilled and frustrated expectations of a better life. As far as Beijing I concerned, it is safer to force them to remain in rural China.

The long-term solution when it comes to helping China’s poor, especially those languishing in rural areas, lies in the state-controlled banks lending to the most profitable companies in urban and rural China rather than directing loans to businesses with the better political connections. This would allow China’s 40-50 million private sector companies to compete on an even footing—essential for rapid job generation and ensuring a more rapid and even rise in the income of the majority of citizens. Meanwhile, there is little in the Central Economic Work Conference communique for China’s that will change the still dim prospects for the poor in rural China.

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