Is Hukou Reform the Key to Reviving China’s Economy?

August 19, 2013, 7:44 AM

Is Hukou Reform the Key to Reviving China’s Economy?

As China’s growth slows toward a 20-year low, leaders are searching for a way to revive the economy’s flagging fortunes. The suggestion from some of China’s top policy wonks: reform the hukou system. That was the message that came through loud and clear from a meeting of top academics and policy advisers at a conference hosted by the government’s Chinese Academy of Social Sciences on Friday.

China’s hukou system — a social management system that ties benefits like health care and pensions to a person’s place of birth — prevents 200 million-plus migrant workers from fully participating in the labor market, said Cai Fang, director of the Institute of Population Studies at the Chinese Academy of Social Sciences.

“Migrant workers don’t have the same benefits as the urban residents,” Mr. Cai said at the economic forum in Beijing, and “that has significantly limited their participation in the labor market.” That is because without access to health care, pensions or education for their children in their host city, migrants must return to their hometowns to settle down and raise a family.

Reforms that allow migrants to tap urban benefits could boost the size of the labor force, supporting China’s growth, Mr. Cai said. If the labor participation rate — economist speak for the share of the working-age population that is actually working — rises by one percentage point each year from 2011 to 2020, it would lift China’s economic growth potential by 0.88 percentage point each year, he added.

And that reform might not cost as much as some fear. The average cost for a migrant worker to become a urban resident is about 2,500 yuan ($409) each year, and the total fiscal costs over the 15 years between 2015 and 2030 are estimated 48% of the nation’s total fiscal revenue in 2012, Kam Wing Chan, a professor from the University of Washington, said at the CASS event.

“Plus, at the beginning of the transition, those workers are net contributors to the economy, just like the undocumented immigrants in the U.S.,” Mr. Chan said, noting that because migrants are typically young and without children, the costs of providing them health care, pensions and education is relatively low.

Still, to make it work Beijing needs to give local governments more power to raise taxes, and the center needs to share more obligations of providing public services. One proposal from He Yupeng, a researcher with the Development Research Center of the State Council: The central government could cover the costs of interprovincial migration, while local governments could take care of migrant workers who move within the provinces.

“What’s happening now is the cities that have opened up the hukou are those nobody wants to go to, and the cities that are slow in loosening their grip on hukou control are those with job opportunities,” Mr. He said. If the central government stepped up to help cover the costs, major cities like Beijing and Shanghai might be more willing to open their doors.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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