Hukou reforms crucial, among others

Published on Author delucam17

The potential for healthy Chinese GDP increase will be reliant upon several key factors. Among them are increase consumer demand, low oil prices, energy subsidy reform, increased privatization, and increased welfare provision. Above all, China will need to foster a domestic increase in demand to make up for diminishing investment and exports, the former drivers of its economy.

One way of doing this is reforming the household classification system called hukou. A large number of people are migrating from rural China to its cities in search of wages above what farming pays, despite agricultural subsidies. Because these migrants are not privy to public services provided to city-classified households, their marginal propensity to consume is diminished. Knowing they will need to pay for healthcare and education themselves, migrants are incentives to save. If structural changes to this policy are put in place, the increasingly vast number of migrants will be more inclined to spend, boosting domestic demand. If household registration laws are not relaxed, record savings levels will remain, causing China to miss out on an opportunity to effectively restructure its economy.

Dreger, Christian, Tongsan Wang, and Yanqun Zhang. “Understanding Chinese consumption: The impact of hukou.” (2014).

4 Responses to Hukou reforms crucial, among others

  1. I wonder how much the costs of restructuring hukou are and how those costs compare to projected increased consumer spending. I am also interested to see how long it would take for the latter to outgrow the former.

  2. As I discussed in my recent post on China’s declining growth rate, it seems that China’s premier, Li Keqiang, is committed to reform as the growth rate declines and the economy moves toward the services sector. It will be interesting to see whether Mr. Li’s vision for the Chinese economy includes a restructuring of the hukou system in addition to his plans to tackle corruption, decrease price controls, and reforming the tax system.

  3. A thought experiment — Miller and (to come) Ma & Adams provide examples:

    City X reforms hukou. Enrollments in schools rise, hospitals get more patients. Meanwhile there’s not much land left to sell …. so how do you as a local government make ends meet? I think the financing of reform is the bottleneck, and that’s a subset of the larger issue of rethinking how local government is financed, including perhaps the development of new sorts of revenue sources such as property taxes. Right now, however, with real estate prices falling, that idea isn’t going to go very far.

  4. This is the why urbanization in China fails to vitalize the consumer economy compared to significant inflow of rural population into cities. As Miller said in his book, delinking hukou system with other social beneftis is necessary, leaving hukou as population registration system. However, creating a new insurance system for local hukou-less people will cost a lot of national budget. In this sense, cooperation of central government in subsidizing local government to cover the cost is necessary.