The unknowns in China's great urban change

Kam Wing Chan says China's bold new urbanisation plan raises many questions, not least how the increased social costs will be funded and whether the focus on small cities can achieve the desired result

PUBLISHED : Thursday, 27 March, 2014, 4:45am
UPDATED : Thursday, 27 March, 2014, 4:45am

After more than a decade of mostly empty talk, China has finally announced a bold move to grant urban hukou status to 100 million people by 2020. The target is a major component of China's new urbanisation plan, which represents a significant commitment towards achieving genuine urbanisation.

In the past two to three years, urbanisation has been refashioned to drive growth and remake the Chinese economy in the coming decades. To accomplish that, it is essential to allow migrants living in cities to have a full urban hukou, and thus be able to access basic urban services.

For the past three decades, "urbanisation" in China has often meant allowing millions to move into cities without giving them an urban hukou, thereby excluding them from using social services. In recent years, it has also meant local governments borrowing huge amounts of money against land (much of it expropriated from rural people) to build infrastructure, some necessary, some not. Impressive GDP growth is generated, some of it suspicious.

More dangerously, such urbanisation has led to mass environmental damage and social unrest. Critics have dubbed this China's new Great Leap Forward.

About two years ago, in response to widespread criticism, then vice-premier Li Keqiang began to push for a "new-style" urbanisation, focusing on the human aspects, rather than construction, and emphasising growth in urban household incomes rather than local-government investment spending on buildings.

At the third plenum last November, it was recognised that China's dual rural-urban social structure, set up in the 1950s, remains a major obstacle to development. The system of hukou, or household registration permits, for rural and urban residents separates them into two disparate social, economic and political spheres, resulting in many problems. Recognition of this opens up the possibility for a bolder and more innovative strategy to guide the latest urbanisation drive. For a more holistic, human-centred approach to succeed, three interrelated reforms are crucial. First, hukou reform, to enable rural migrants to build more secure lives for themselves and their families in the cities and towns where they now live.

Second, reform of the rural land-transfer system, to permit a more equitable process for rural land conversion to urban use.

Third, fiscal reform, to create a sustainable local tax base to fund the recurrent social expenditure that will result from expanding the urban service system to include migrants. Of these three, the newly announced plan rightly sets hukou reform as the top task. Beneficiaries of the plan will be those no longer involved in farming, including many current migrants. College-educated and skilled workers, and longer-term migrants will get priority.

Preliminary estimates suggest that the average annual hukou conversion, from rural to urban, in the next six years will be about 50 per cent more than the average achieved in the previous decade, but the number allocated to migrants will be two to three times higher than in the past. This is still lower than what I called for last year in my hukou reform proposal, which laid out a plan to phase out the entire hukou system by 2030.

In terms of actual measures to achieve the target, I have serious concerns about where the conversions will happen. The plan calls for expanding the practice of easing hukou restrictions in towns and small cities, while also extending controls on migration to the big cities.

Relaxing hukou restrictions in smaller urban centres will only help a minority of the migrants, most of whom are in the big cities. Most new jobs, especially those in the private sector, will continue to be generated in these mega cities. More stringent restrictions on migration to them will probably be ineffective as well as economically counterproductive.

A more geographically balanced pattern of development may be desirable socially, but this is seldom achievable in developing countries without strong government intervention or public funds, such as through relocation of major government functions out of the larger cities, or offering tax incentives to entice businesses to move to smaller urban centres. Is China ready to take those steps?

As for reforming the land-transfer system, there is still no clear direction because it is not easy to do so fairly in today's China. Advocates of expanded property rights for farmers argue that they should be allowed to use their land as a source of capital, as collateral to fund agricultural investment or to finance a move to a city. Others contend that any such change must proceed with caution, since further marketisation of rural land will greatly increase the risk of mass rural dispossession and dislocation, especially in many inland provinces with weak protection of rural property rights.

These contending views have led to uncertainty. The third plenum decision apparently gave the green light for reform, but since January there have been many signs that it will not proceed immediately. This may reflect concerns of some leaders over the risks of mass dislocation.

Undoubtedly, to address the needs of the "new-style" urbanisation, more work is required in reforming the fiscal system and related institutions. For example, the plan contains no cost estimate of the increased social expenditure; in the cities and towns where migrants are granted a local hukou, local governments will presumably be expected to foot most of the bill. So far, no strategy has emerged to create a fiscal mechanism to enable cities to provide for millions of newcomers on an ongoing, sustainable basis. The new blueprint does reaffirm the new municipal bonds plan, allowing local governments to raise funds in the market to finance urban construction. But a local revenue system is needed that is tied to the growth of the population, such as one based on taxes on property or household consumption.

The blueprint is a start for charting a new direction of urban development, with the hope of bringing more balance and prosperity to the country, especially in urban areas. It will probably whet the appetite of many for more comprehensive change. The plan has identified some important broad strokes, but specifics are still lacking or being worked out. Like many other good plans in China, it can still be distorted, usurped for other purposes or even reversed as it gets implemented at the local level, where the real test will lie.

The commitment to granting urban hukou permits for a much increased population of migrants in the next few years is a major step forward and deserves praise. Let's hope this new blueprint, along with its pledge to improve the human side of urbanisation, will push China onto a path to finally end its hukou era in the not-too-distant future.

Kam Wing Chan is professor of geography at the University of Washington. His research focuses on China's urbanisation, the hukou system and migrant workers