In Wen Jiabao's government work report, the theme of urbanisation again featured prominently. China has achieved an urbanisation rate of above 51 per cent. However, as at least 16 per cent (more than 200 million people) of the total population, such as migrant workers, are not registered in their city of abode, they lack full access to key public services including health care and education.
Behind the facade of "rough urbanisation", a large proportion of urban residents still remain second-class citizens. Therefore, fully integrated urban residents probably account for around 35 per cent of China 's population today.
It is widely recognised that the household registration system is at the heart of the matter. Since the system cannot be abruptly demolished without social upheaval, gradual change is needed. The issue is complex. For such a big challenge, perhaps China should follow its development path of experimentation and market-driven reforms.
Part of the solution may be staring us in the face. The "blue chop" hukou system - under which migrants were offered urban resident status with a certain amount of investment - was introduced some two decades ago but later phased out in Shanghai and Shenzhen. Tianjin is the only major city where such a system is still in place.
The "blue chop" system was simplistic and overly tied to property development. When urban services could not cope with the influx of new residents, the system was stopped in cities where the long-term costs outweighed the short-term real-estate-related economic benefits. Today, China could consider implementing a revised system, addressing past shortcomings while maximising proven benefits.
It could first be revived, for instance, in cities with populations of 5-10 million, particularly those with networks to major metropolitan areas. This could help promote efficient urbanisation while diverting population growth from mega cities such as Beijing and Shanghai. After such a scheme has gained traction, a second wave could begin in cities with a population of below 5 million.
The previous system has been criticised for selling hukou in exchange for housing units. Indeed, property ownership may well be a key factor, but need not be necessary or sufficient. Like Shanghai , cities may set different tiers of hukou with different entry requirements, different ongoing obligations and different benefits. Preference should be given to the rural population around the areas, and to existing residents.
Cities may tailor the scheme to attract experts in particular fields. As human capital becomes more important in economic development, those cities that manage to attract a quality workforce will deliver superior economic performance. The scheme will combine the benefits of market-based incentives while also providing an effective policy tool for national planning.
A key problem in the past was the short-term pursuit of land revenue without taking responsibility for the long-term social costs. Therefore, cities should be required to set aside a proportion of land revenue for the development and operation of urban and social services.
In addition to the city-level system, a metropolitan-wide hukou system could also be launched. In Shenzhen, the newest of the mega cities, fewer than 20 per cent of the population have local hukou; increasing this figure should be a social development priority.
Guangdong could try a new breed of metro hukou for the Pearl River Delta. The 50 million urban residents in the top six delta cities - Shenzhen, Guangzhou, Dongguan , Foshan , Zhongshan and Zhuhai - have similar income levels. So a new class of metro hukou, allowing full mobility within the delta area, could be offered. This would further improve the economic and social cohesion within the region.
Beyond the regional level, a national hukou system, allowing limited mobility across major cities such as Beijing, Shanghai, Guangzhou and Shenzhen, could be considered at an appropriate time.
In parallel to macro reforms at the metro level, micro reforms at the district level may also be tested. The thresholds for blue-chop hukou in Tianjin, for example, vary across districts.
China has used a combination of experimentation, market-based reforms and effective planning to create growth over the past three decades. Regional leaders have been enterprising in attracting capital and increasing their gross domestic product. With the right measures and incentives in place, there is no reason to believe they will be any less successful in implementing effective hukou reform.
Through such initiatives, more citizens would become fully integrated urban residents, enjoying the full benefits and bearing the civic responsibilities of urban citizenship.
Winston Mok is a private investor, a former private equity investor and a McKinsey consultant who started its China practice