China’s Hukou System: Overview, Reform, and Economic Implications

China’s Hukou System: Overview, Reform, and Economic Implications

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Updated January 7, 2016
China’s Hukou System: Overview, Reform, and Economic Implications
What Is Hukou?
determined by factors such as age, level of education,
First introduced in 1951, the Chinese hukou (household
business ownership, investments over a certain amount, and
registration) system is a categorization of its citizens based
possession of a valid Temporary Resident Certificate.
on both their place of residence (living in urban/rural areas)
and eligibility for certain socioeconomic benefits
Figure 1. China’s Urban Population Growth and
(agriculture/non-agriculture). Hukou is issued through a
Urbanization: (1950-2013) (in millions)
process administered by local authorities and solidified into
inheritable social identities that especially limits the
mobility of Chinese laborers.

Source: National Bureau of Statistics of China.
Why Did China Impose a Hukou System?
The Chinese government imposed the system to regulate
Table 1. Comparison of Formal and Informal
population distribution, especially in large cities. Since
Employment
economic reforms started in 1979, hundreds of millions of
Informal
people have migrated from their home towns to work in
Formal Employment
Employment (No
urban areas, such as Shanghai. The number of rural laborers
(Hukou for city you
hukou for city you
working in China’s cities was 274 million in 2014, 36% of
Characteristics
work in)
work in)
the total workforce. Although such workers are allowed to
Household
Non-agriculture and local Agricultural and non-
reside in the cities where they work, their job situations are
registration type
local
often more difficult than those of holders of urban hukous
Urban residency
Full legal status
Illegal or temporary
(see Table 1), and they are generally denied access to social
status
entitlements, such as pensions, medical insurance, and basic
Socioeconomic
Mostly state sectors and
Small and self-
education for their children.
sectors
state-owned enterprises
employed enterprises
How Does the Hukou System Work?
Occupations
Managerial staff,
Physical labor, self-
Traditionally, an individual’s hukou status (agricultural,
technicians and skilled
employed
non-agricultural, blue-stamp, and other types) is an
workers
inherited social identity, but in recent years it has become
Employment
Determined by planning
Based on personal
more complicated with the introduction of new categories
Channel
or formal channels
contacts and market
of urban hukou. The differences of hukou status can be seen
information
in terms of accessibility to urban benefits and opportunities
(such as access to education, housing, and health care), and
Work status
Relatively less demanding Highly demanding and
qualifications required for a hukou category. Each province
and stable
unstable
or large city has its own system to obtain a local hukou
Entitlement to
Full legal status
None or temporary
registration.
basic social
entitlement
security and
Rural residents who wish to permanently move to an urban
benefits
area must submit separate applications to change their
Housing
Allocated by work units
Low-cost shelters or
permanent residence and their agricultural status. They
or self-owned
homeless
must also obtain authorization from their current place of
residence and apply for temporary registration at their
Source: Institute of Population and Labor Economics.
destination. For example, Shenzhen’s three hukou
Chinese Demographics
categories (Temporary, Blue-Stamp, and Regular) are based
Many economists contend that China’s demographic
on a set list of qualifications that receive certain
entitlements and benefits based on the specific categories
policies, particularly its one-child policy (implemented in
1979), are beginning to have a significant impact on the
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China’s Hukou System: Overview, Reform, and Economic Implications
Chinese economy. For example, according to a McKinsey
government released the National New-type Urbanization
Global Institute study, China’s fertility rate fell from about
Plan (2014-2020), which stated the goal of raising the ratio
5.8 births per woman in 1964 to 1.6 in 2012. This is now
of permanent urban residents to total population in China
affecting the size of the Chinese workforce.
from 54% to 60% by 2020 (in comparison, the U.S. rate is
currently 81%), and the share of urban residents relative to
The existence of a large and underemployed labor force
the population holding an urban hukou would increase from
was a significant factor in China’s rapid economic growth
35% to 45%. The plan stated that the government would
when reforms were first introduced. Such a large labor
grant urban residency to around 100 million people who
force meant that firms in China had access to a nearly
have moved to cities from rural areas.
endless supply of low-cost labor, which enabled many firms
to become more profitable, which in turn led them to boost
In December 2015, the Chinese central government
investment and production. Some economists contend that
outlined a broad plan for cities to provide special residency
China is beginning to lose this labor advantage. China’s
permits to migrant workers if they met certain
working population has reportedly fallen for three straight
requirements, such as residing in the city for six months,
years (in 2014, it reportedly dropped by 3.7 million people).
maintaining a steady job, a steady residence, or are studying
The McKinsey Global Institute predicts that over the next
at a school (and can provide certain proof, such as an
50 years, China’s labor force could shrink by one-fifth.
employment contract or tenancy agreement). That status
Some economists contend such factors could lead to much
would grant migrants access to some public services, such
smaller rates of future economic growth. As the labor force
as education (up to age 15) and basic health care without
shrinks, Chinese wages could begin to rise faster than
having to give up their rural hukou rights. They would also
productivity growth, which could make Chinese firms less
be allowed to register a car or obtain a passport locally
competitive, shifting some manufacturing overseas.
(rather than back home). The Economist estimates that the
plan could enable 70 million children living in the
The one-child policy has also resulted in a rapidly aging
countryside to join their migrant parents in the cities, but
society. According to the Brookings Institution, China
warns that many migrant workers may lack the necessary
already has 180 million people aged over 60, and this could
documentation needed to obtain special residency status.
reach 240 million, or 20% of the population, by 2020 and
360 million, or 27% of the population, by 2030. With a
An urban hukou in cities with fewer than 1 million people
declining working population and a rising elderly
might be obtained if an applicant has a stable job, a
population, the Chinese government faces challenges trying
residence, and has paid into a government social insurance
to boost worker productivity in order to maintain healthy
program for three years. This requirement increases to five
economic growth and expand spending on health care and
years in cities with 1 to 5 million people. Cities with over 5
elderly services. Such factors likely contributed to the
million people will be able to set up a complex point system
government’s announcement at the Communist Party’s
for granting an urban hukou. The government states that
Fifth Plenum in October 2015 that all married couples
cities can enact their own regulations based on local
would now be allowed to have two children.
conditions. For example, in December 2015, Beijing
released draft regulations for granting new urban hukous for
Hukou Reform and Economic Implications
migrants. Applicants would need to be under the age of 45,
The central government has made hukou reform a top
have a Beijing temporary residence permit, and have paid
priority as part of its plans to increase the urbanization of its
social security premiums in Beijing for seven years. Next,
population, which is viewed as important to boosting
they would need to accumulate a certain number of points
national productivity (as labor is used more efficiently) and
based on such factors as employment, housing, education,
increasing private consumption (since urban residents
and tax payments to obtain a Beijing hukou.
generally have higher incomes and greater access to goods
and services than those living in rural areas). However,
Hukou reform could increase the allocative efficiency of the
hukou reform has met some resistance from urban
labor market by giving workers (and their families) more
governments and middle-income residents concerned that
freedom go where their labor is needed; boost consumption
they could become burdened with large new financial
(and reduce high savings rates) by those now eligible for
obligations, as well as migrant workers in cities concerned
public services; and narrow income disparities, especially
that they could lose their land rights back home if they got
between urban and rural areas. According to one estimate
an urban hukou.
reported in the China Daily, comprehensive reform to the
hukou system could add two percentage points to China’s
In November 2013, at the Communist Party’s Third Plenum
GDP growth. Such reforms could benefit U.S. economic
of its 18th Party Congress, the government announced plans
interests if they generate higher demand for foreign goods
to “introduce new population management methods,
and services in China. A major challenge for the central
accelerate the reform of household registration system,
government will be to ensure that local governments are
completely lift restrictions on new residence registration in
able to fund increases in social welfare spending.
administrative townships and small cities, relax restrictions
on new residence registration in medium-sized cities in an
Wayne M. Morrison, Specialist in Asian Trade and
orderly manner, lay down appropriate conditions for new
Finance
residence registration in large cities, and strictly control the
population size of megacities.”
IF10344
In March 2014, the

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China’s Hukou System: Overview, Reform, and Economic Implications

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