Third of China's city-dwellers are still second class citizens

PUBLISHED : Wednesday, 04 April, 2012, 12:00am
UPDATED : Wednesday, 04 April, 2012, 12:00am


It made headlines around the world at the beginning of this year when government statisticians announced that more than half of China's 1.35 billion people now live in the cities.

But what most of the news articles failed to mention is at least 200 million of China's 690 million city-dwellers- and as many as 250 million, according to some estimates- are still registered under the out-dated pass laws as living in the countryside (see the first chart).

This is a huge economic headache. China's hukou household registration system was introduced in 1958 to force farmers to remain on the land, where they had no choice but to sell their produce to the state at controlled prices.

It's a long time now since the laws have been used to prevent freedom of movement, and today hundreds of millions of citizens born in poor rural areas live and work in China's booming cities.

But the hukou system has an enduring economic effect. It means those 200 million migrants who are still registered as rural residents are treated as second-class citizens in their new homes.

Because their documents classify them as living in another district, they are limited in the work they can get.

According to one recent research paper, only 5 per cent of these unregistered workers have steady jobs, compared with 80 per cent of their neighbours.

More than 90 per cent are in temporary employment or are self-employed.

Not surprisingly this means they earn less than their registered neighbours - typically 30 per cent less, according to the same study.

But it's not just in terms of employment opportunities that unregistered migrants lose out.

They seldom have access to public housing, their children may be refused entry to local schools and they are often ineligible for pension and healthcare benefits.

As a result, they tend to save a higher proportion of their incomes as a precaution against hard times ahead (see the second chart), which naturally suppresses their spending as consumers.

This means the hukou system ensures that 30 per cent of China's urban population are under-paid, deprived of social benefits and constrained in their ability to consume.

For an economy looking to rebalance itself more towards consumer spending-driven growth, the hukou laws are a major obstacle to progress.

According to Kai Xu at Zhejiang University in Hangzhou, scrapping the system would increase China's inflation-adjusted income per capita by 5 per cent at a stroke.

This sort of calculation impresses China's leaders. Speaking at last month's National People's Congress, Premier Wen Jiabao promised 'to give a higher priority to registering rural migrant workers'.

But although the benefits of getting rid of the hukou are so compelling that some cities have already eased their local registration requirements, the system's defendants are likely to ensure it remains firmly in place for a long time to come.

Although the hukou system is deeply iniquitous and a drag on China's economic development, employers - and some local governments - like it because it provides them with a cut-price labour force.

According to one estimate, if urban employers were obliged to make welfare contributions on behalf of their migrant workers, their payroll costs would shoot up by between 35 and 40 per cent overnight.

In other words, the hukou system has effectively provided the factories and construction gangs of China's coastal cities with a 30 per cent subsidy on their wage bills.

That's a big advantage, especially for manufacturers already facing higher wage bills and shrinking margins.

As a result, although the national social and economic gains from scrapping the hukou system would be immense, there are plenty of local employers and officials who rely on it to keep their labour costs low and who won't be prepared to give it up without a struggle.