The great transition: The government is right to reform the “hukou” system, but it needs to be braver

The great transition: The government is right to reform the “hukou” system, but it needs to be braver
Mar 22nd 2014 | From the print edition


CHINA’S future is now firmly urban. Already around 54% of its people live in cities—and the proportion is rising fast as ever more jobs are created in offices, factories and construction sites, luring ever more people from the countryside. There are now around 250m rural migrants living in cities. Despite many wobbles, in the property market (see article) and elsewhere, this extraordinary revolution has been surprisingly smooth: there are, for instance, very few shanty towns of the sort you see in Brazil or India. Yet at the heart of prosperous, urban China sits an enormous inequality, based upon the hukou system of household registration.To have full access to schools and hospitals in the cities at subsidised urban costs, you must have an urban hukou. But if you were born in a rural area then your hukou (and that of your children) is registered there—and changing that is very difficult. Only 36% of the people who live in cities qualify as residents there. This has, in the past, helped control the flow of people and kept urban labour costs down while letting the new urban middle class retain their privileges.
The first generation of migrants was happy just to get paid more in the cities. Now many complain about how unjust the system is, and it has begun to look politically dangerous. The labour of these poor migrants built China’s new cities; and they and their children form an increasingly angry urban underclass, unable to live the “Chinese Dream” being touted by China’s president, Xi Jinping.
That explains the importance of the government’s long delayed “people-centred” plan on urbanisation, released on March 16th (see article). It wants 60% of China’s people to live in cities by 2020, putting it broadly in line with the current average for countries with similar income levels to China, and it wants 45% of them to have full urban hukou.
This is a huge change. It involves giving full urban hukou to 100m of the 250m migrants. It could be a significant boon to the economy, too, enabling migrants, who now save a large proportion of their wages because of fears about the cost of health care, to consume more. But the plan should have gone much further.
You say you want an urban revolution
There are two main areas where it falls short. First, the hukou liberalisation focuses on cities with under 5m people. Yet most new jobs are being created in the 16 big cities with populations of more than 5m, and most of the dodgy government debt seems to be concentrated in the smaller cities whose officials are therefore unwilling to fork out for benefits for new urbanites. Large cities can give urban hukou, but only on a complicated points-based system which tends to favour the prosperous, giving graduates and skilled workers a better chance. When tried elsewhere, that ends up allowing mainly the elite to migrate. The points-based system should be scrapped and the door opened faster and wider.
The second problem is bigger. Though migrants hate the way they are discriminated against in cities, many are nervous about accepting an urban hukou, even if offered, as they do not see it as a reliable source of security. Urban welfare systems are so new and so imperfect that migrants doubt, with good reason, that they will be able to draw on unemployment benefits or a promised pension, especially if they move to another city. So they keep one foot in the countryside, holding onto their tiny patch of land and never making the break. Even if they want to sell their land, they are still not allowed to do so. The plan thus needs two other important strands: more cash for public services in the cities, and allowing the establishment of a rural land market, so that the buying and selling of land could help enrich farmers just as it has enriched urbanites.
These are massive changes. But success in the next stage of China’s epic modern development depends on them. Only then can it become the urbanised, modernised nation it longs to be, and only then can the Chinese Dream become reality.


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 (, 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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