China’s Hukou System Explained

What is the China “Hukou” System

China’s hukou system was introduced in 1958 as a modern means of population registration. It was set up as a part of the economic and social reforms of the initial years of the communist regime. In 1985, the hukou system took a large step in manifesting itself in the fabric of everyday society through the provision of personal identity cards.

In its current version, the Hukou fulfills three main functions: the control of internal migration, the management of social protection, and the preservation of social stability.

The control of internal migration is the first objective of the hukou system. Each citizen must be registered at birth, similar to the way a census functions. The registry, which is the hukou itself, contains each individual’s basic demographic information, which includes the following:

  • Status, ie urban or rural;
  • Legal address;
  • Sector of activity;
  • Religion; and,
  • Physical description.
Hukou
Photo of the Hukou in it's modern version (2020)

Rationale

The Hukou system was originally created as a means to maintain a sense of social order, protect the rights of Chinese citizens, and “be of service to the establishment of socialism.”

The idea behind the system’s establishment was that because rural areas had the most opportunity to utilize labor, China’s government felt that a large majority of the country’s population should live and work in those regions. This idea led to the belief that giving citizens the ability to move freely around the country could pose a threat to the agricultural output. 

Additionally, China kept strict restrictions on migration into the country’s larger cities to prevent megacities from developing slums or poor health conditions as a result of the fast-growing population. This has been a persistent problem in nearby countries and China’s government wanted to put measures in place to prevent them from facing these problems in their own country. Thus, the hukou allowed China to maintain stability throughout its steady ascent into becoming a global economic powerhouse.

Evolution of the Hukou System

After 1958, Chinese authorities orchestrated a rural exodus to stimulate that portion of the economy. Since the 1980s, however, restrictions on mobility have been largely enforced.  Currently, individuals who plan on staying more than three days in a location outside their city of residence will need to acquire a temporary residence permit.

The Hukou system was implemented as a tool for geographic, economic, political and social control resulting in an apartheid structure that denies farmers the same advantages and rights as those experienced by residents of the urban areas.

In it’s early years, the People’s Republic of China was largely agrarian. To hasten industrialization, the government emulated the Soviet model of prioritizing heavy industry. In order to finance such an expansion, authorities overpriced industrial goods simultaneously underpricing agricultural ones. Therefore, the two sectors experienced unequal exchange where peasants’ agricultural products were paid less than their market price.

For the government to sustain such an untypical imbalance, it created a system that will impose restrictions on the free flow of relevant resources, more particularly labor between agriculture and industry in the city and the countryside. This resulted in the classification of individuals into either urban or rural residents. The state required these two categories of the population to continue residing and working within their geographical locations.

While traveling was allowed, it was highly controlled and subjected to conditions. They will not be able to gain access to education, employment, food services, healthcare and other public services unless they obtain a government-issued urban-to-rural Hukou. To analogize, a rural farmer who decides to travel into the city without the necessary Hukou is like an illegal alien in America.

Evolution of Hukou
Evolution of the Hukou system from 1958 - 2020

However, with the requirements and conditions implemented by the government relating to the issuance of Hukou, acquiring one is highly difficult, if not impossible. This fact was even worsened by the tight conversion quotas imposed by the government annually.

As decades passed and China began to become more industrialized, the hukou system was reformed to adapt its structure to the new economic state. In 1984, the State Council conditionally allowed peasants and lower class members of society to enter market towns across the country.

Residents of China gained access to a new kind of permit, which was called the “self-supplied food grain” hukou. The requirements to receive this permit included that the resident must work for a Chinese business, hold accommodations in the country, and have the ability to provide their own grain. Cardholders of this kind were not able to move to an area more urban than the location where they resided at the time they acquired the permit. 

In the early 1990s, the People’s Republic of China launched another hukou permit called the “blue-stamp“. This hukou was available to a wider population and allowed residents to legally migrate to larger cities. These cities include China’s Special Economic Zones, which are known as tax havens for foreign investors. Eligibility for this hukou is primarily limited to residents with direct relations to local and foreign investors.

After joining the World Trade Organization in 2001, China’s hukou system experienced a form of liberation after the country’s agricultural sector was impacted by foreign competition and massive job loss. Regulations surrounding work permits were relaxed to accommodate this cultural and economic shift.

In 2003, the Chinese government made changes to the way illegal immigrants were to be detained and processed. This change was the result of a case that went viral online where a college graduate was arrested and taken into custody and subsequently beaten to death for working illegally in Guangzhou without having the correct Hukou ID. 

Although the Hukou system continues to face reforms periodically, the primary functions of the system continued to reveal disparities between the industrial and agricultural factions of China’s economy. While there have been influential voices calling for the end of the Hukou system, its removal could potentially damage urban infrastructures due to the immigration of a large volume of people from the rural parts of the country into the cities.

who gets a hukou
Illustration by The Wall Street Journal

The Hukou System Prior to the Reform

The urban population has benefited from the Hukou system throughout the history of early China. By the middle of the 20th century, however, particularly during the Great Famine, those with rural Hukous were grouped into communal farms. Their agricultural produce was collected by the state as tax and in turn given to rural dwellers. As a result, they underwent massive starvation. Only when this crisis was felt in the urban areas did the government move to improve the situation.

While residents of the urban areas benefited from various socio-economic advantages, the marginalization of rural citizens remained even after the Great Famine. Farmers pay taxes three times higher than urban dwellers, but continue to access lower standard of life, education, and healthcare, if at all. China’s Hukou system only served to restrict increased mobility, thus creating a caste system within the society.

In the 1970s when the country was undergoing capitalist reforms, about 260 million rural residents traveled to the cities illegally with the intention of accessing the development in the economy enjoyed in the urban areas. Many suffered discrimination and even imprisonment. Increased unemployment and criminality are blamed on them. Yet, they continued to live in the urban areas, but in street corners, shantytowns and railway stations.

Benefits Brought About by Government-Issued Hukou

Early on, an urban hukou made it possible to provide every urban household with access to housing, food, and other necessities based on their status and financial state. Despite a decrease of public subsidies during the country’s economic liberalization in the 1980s, the urban Hukou remained important for accessing employment, education from the best universities, and the ability to purchase real estate in the urban areas.

There were numerous social security benefits that came with a government-issued Hukou, which include the following:

  • health insurance;
  • retirement allowances;
  • unemployment insurance;
  • maternity benefits;
  • work insurance;
  • housing fund, as provided by the employer.

These benefits constituted the “mandatory benefits” provided to all Chinese workers, which were naturally subject to exceptions and applied only to those working within their locality where they were registered and not within the place of residence. However, with the rise of internal migration towards urban centers at the beginning of the economic opening in 1978, the urban hukou has become a piece of contention within Chinese politics.

By the 1990s, these benefits extended further than they had at any point prior.  Relatives of hukou holders gained access to their own hukou status by virtue of the reforms implemented during the period. This included spouses of holders, but only those who were buyers of large real estate assets or those working with special qualifications. A number of migrant workers were also given residence permits during this period, giving entitlement to limited benefits.

By 2001, those residing in small towns and suburban areas built outside of the city gained the right to be issued hukou status as long as they met certain criteria, usually regarding income. Another means for rural residents to acquire a hukou was to pay a fee to the government. Those living in larger towns were more restricted in terms of the criteria needed to acquire a hukou in order to limit the costs related to the increased speed of urbanization.

Currently, the hukou reforms remain decentralized, modest, and aim to be a progressive measure to further society. The most recent iteration of the reform was prioritized by the State Council of China and was developed from 2010 to 2012. The goal was to ease migrants’ access to a second-rate hukou while leaving the existing rules within cities unchanged. This development was designed to allow migrants living in a smaller town with a fixed address and stable job to acquire an urban hukou. Under this reform, local authorities are responsible for determining the minimum eligibility period of residence.

In medium-sized cities, migrants will be eligible to get an urban hukou if they obtain stable employment for three years and have participated in the social security scheme for a number of years. These new rules also limit the scope of rural land exchange programs against an urban hukou.

Hukou Conversion

In recent years, hukou policy reform has continued to shift in a direction that makes it easier for migrant workers to convert their hukou status. With agricultural land continuing to rise in value, rural hukou holders are hesitant to part ways with their agricultural hukou status in exchange for the increasingly common urban hukou. This strategic move by rural landowners gives these members of society the ability to leverage their land to either rent property to migrant workers or prepare to sell the land to the federal government in future urban expansions.

Issues with the Current Hukou System

A consistent consequence of the hukou system has been that it benefits people living in larger cities and provides substantial challenges to those living and working in rural areas. This became evident during the Great Famine of 1959  which we briefly mentioned earlier. People who held rural hukous were moved to work on communal farms and the country taxed these farms to the extent where the majority of the output was given to those with urban hukous and other residents of the country’s larger cities. This government-required move led to severe starvation for these rural workers and eventually led to the abolishment of China’s campaign for rapid urbanization, which was known as “The Great Leap Forward.”

Chinese citizens living in urban cities benefited from the socio-economic improvements while rural residents continued to be negatively affected. It’s estimated that today a farmer’s annual income is approximately one-sixth of the average citizen living in an urban city. Farmers also pay a tax rate that is 3x the amount paid by urbanites, which can create challenges for upward mobility. The hukou system is complicated, and there are varying opinions as to whether the system creates an unbalanced caste system in China, or if it is a necessary measure to support its growing economy.

The current hukou system continues to impose an economic-political differentiation between holders of an urban hukou and a rural hukou. It is said to restrict numerous privileges for “real” city dwellers, including a predefined quota of slots in universities, access to certain jobs, and unemployment benefits. The city of Guangdong is an exception to this norm, where there are ongoing reforms that aim to extend these benefits to migrants, including access to a housing fund, public housing, and higher quality publicly funded services.

In other major cities across China, an urban hukou is often a prerequisite for buying city housing. In rural areas, rural citizens have their own advantages, specifically regarding the right to take advantage of the agricultural land, receive a preferential allocation of residential land, and flexible application for the Single Child Act for those whose first child is female.

However, China’s decentralized system has created imbalances in public spending between cities and the countryside. These disparities resulted in unequal access to goods and services, and variability in the quality of the latter. Therefore, there are inequalities in employment, with the citizens of certain regions being better equipped for the labor market.

This discrimination favoring urban dwellers has contributed to rising inequalities across China, which have been growing steadily for two decades. However, there is potential for this rise to slow in the future with the recent economic growth in central and western China. There is potential for increased wages for migrant workers and reduced income disparity between migrants and natives living in cities. This reversal of the common economic trends may continue to take place moving forward, pending progressive hukou reforms that will enable all citizens to seize existing opportunities.

Since the larger cities have reserved the delivery of new hukous to households with high income or high level of education, there is currently a large group of urban residents who are also being restricted from getting social protection and health insurance. This means that while more than half of the Chinese population now lives in cities, only 35% of city dwellers have an urban hukou. The majority of inhabitants in the cities are therefore lacking the full social protections possessed by many of their peers.

For this reason, the hukou system has a powerful deterrent effect on migrant workers wishing to settle permanently in the city. The inability of migrants to access public social protections is currently one of the major obstacles to China’s transition to the economy of consumption the government aims to achieve.

Due to the hukou registration system, at least 250 million migrant workers lack access to social payments, whether it be for their children’s education or medical assistance for themselves. These urban disparities, coupled with sometimes archaic rural regulations, constitute a particularly important macroeconomic obstacle, particularly with regard to the five-year plan adopted by Beijing in 2011. This iteration of the plan is the twelfth in the city’s history and is designed to rebalance China’s economy in order to increase domestic consumption and reduce inequality.

In the countryside farmers typically do not own their land, as it is lent to them by the authorities in thirty year increments. In addition, user rights are not clearly defined and there is no formal market for farmland. Without urban hukou, migrant families tend to return periodically to cultivate their land, to maintain usufruct, and ensure a minimum level of social protection, which is also detrimental to agricultural productivity.

The registration system has, therefore, become a major cause of inequality, an obstacle to economic transition and a source of many social problems.

Impact on China’s Economy

As mentioned above, since 2014 China has been softening the distinction between the urban and agricultural hukou. In 2016, the country set a target of granting an urban hukou to 100 million immigrants by the year 2020. 

The purpose of such reforms is to create more equality between the different types of hukou holders and create more mobility in the labor markets. Granting migrant workers with the urban hukou was also done in hopes to boost domestic spending and consumption by the migrant communities who historically focused on saving most of their income for future expenses, such as marriage or retirement. 

China’s hukou system continues to be a reflection of the country’s population management focus that influences the country and the opportunities available to migrant workers. 

China has also been faced with challenges presented by the lack of mobility of Chinese employees due to the restrictions from Hukou. The Chinese workforce has shrunk every year since 2011, which has strained the economy and led to a significant increase in annual labor costs. 

As part of the country’s efforts to find a solution to this problem, Chinese officials turned their attention to rural migrant workers. In 2017, there were just under 300 million migrant workers in China, which made up approximately ⅓ of the country’s working population and a vital component of China’s economy. 

This is one reason that China’s desire to continue reforming and improving their Hukou system has remained steady over the past few decades. China has been focused on transitioning its economy in a direction that advances its services industry and improves its consumption of domestic goods. By minimizing restrictions on labor mobility and making the hukou a catalyst for improved social services, the Chinese government aims to boost the country’s overall economy. 

Impact on Employees Working in China

It’s important to keep in mind that the Hukou system directly impacts both local and foreign employees working in China. Although it’s uncommon for employers to pay close attention to the location of their employees in a general sense, there are certain aspects of Hukou that can create challenges for employee mobility. This also creates struggles for Chinese corporate recruiters, as the Hukuo regulations can make it difficult to attract and retain talented professionals.  

Compensation

Chinese companies will often provide assistance to their employees in the process of acquiring an urban hukou. This ability to gain preferential treatment in the social welfare system is a key piece of recruitment that allows Chinese companies to acquire top candidates. 

Companies that provide household registration documents take on the responsibility for the employee’s hukou conversion. It’s common for businesses to have a legal team that provides assistance during this conversion, or they will outsource the assignment to a third party legal firm or international PEO. Some organizations will take the extra strep to pay the Hukou fee conversion as a benefit to the employee.  

Offering this benefit allows companies to gain leverage in contract negotiations and retain their more skilled workers for a longer-term than they may have been able to otherwise. Companies can also offer social welfare compensation to employees who had originally sought to maintain their rural hukous instead of transitioning to their new urban hukou documentation. 

The reason that many rural hukou holders seek to hold onto that hukou status is that valuations for rural land have increased in the past decade, and obtaining an urban hukou would mean being forced to give up their valuable land near their rural homes. 

Of course, companies have the ability to offer indirect benefits to employees in order to incentivize them to accept the hukou status that makes the most sense for the business. These incentives can include a housing fund, health insurance, transportation subsidies, and more. 

Talent incentive

Local governments in China have recently been granted more control over their territories in matters concerning Hukou eligibility, quotas, and conversion factors. 

However, megacities maintain their objective to strictly control their population size and have more rigid criteria for granting residents a hukou. 

In Beijing, Shanghai, Guangzhou, and Shenzhen, the government uses a point-based system to identify whether an applicant meets their desired criteria. Factors that influence a person’s point system include property ownership, employment type, education, legal record, etc. 

Medium to large-sized cities will often offer preferential policies to talented professionals in order to convince them to come to their cities. Smaller cities will commonly take the same approach as college graduates who have high-potential. 

For example, Wuhan grants permission for workers who have graduated within the previous 3 years to apply for its Hukou. 

It’s important for companies to understand the hukou policies for each individual city they are looking to hire and expand into in order to remain compliant with both municipal and federal regulations.

The China Hukou System Today

The China hukou system is gradually seeing change, although the benefits of this change are still a subject of debate between the rich and poor factions of society. 

In terms of the goals China set for its nationwide urbanization, the hukou system has been a success. The country’s megacity populations have grown to just under 900 million residents, which is 5x their total population in 1980. Three out of every five Chinese citizens reside in cities, with an additional 15 million migrating into urban areas each year. 

However, with over 200 million city dwellers still living without urban hukou status, these members of Chinese society are often treated as second-class citizens. In 2014, China’s government created its “new urbanization plan” which promised to assist over 100 million residents in the process of swapping their rural hukou for an urban one. In theory, this would create a new level of equality that had previously seemed unlikely in urban parts of the country.

 

China urban population
Illustration by The Economist

Since China began implementing this plan after its 2014 announcement, the results have created a conflicting outcome for affected parties. One outcome of the plan is that the central government has shifted its focus to providing economic boosts for smaller cities. While this move has carried out benefits in some ways, the federal government’s fear of offering residency rights to lower-skilled workers in the big cities places certain limitations on these individuals. 

The intended goal of this action is to stimulate these smaller economies with the presence of new workers, and cities with fewer than 1 million residents were advised to offer a hukou to any and all applicants. As the federal government continues to expand on this plan, in 2019 government officials advocated that cities with fewer than 3 million residents do the same. 

With this being the current plan for China’s smaller cities, the federal government has focused its attention on big cities on attracting more highly skilled residents with significant wealth. By doing so, the larger cities gain access to immediate economic boosts without requiring much government spending. Residents of this preferred class are typically offered four paths to this hukou in larger cities:  

  • Becoming an investor in a local business
  • Purchasing a home
  • Holding a university degree
  • Having a job that qualifies them for this expedited hukou process.

In recent years, more affluent cities on China’s coasts have raised their standards for gaining local hukou status, while cities more inland have continued to lower them. Often referred to as a “talent war” by municipal governments trying to attract talented professionals, these strategic measures also seek to entice home buyers and boost their respective real estate markets. 

Despite the benefits the hukou system provides to economies of various scales, the lack of mobility continues to present challenges to the country’s economic development. According to an academic study by Singapore Management University’s Wen-Tai Hsu, there is evidence to suggest that allowing residents to live wherever they please would provide significant boosts to China’s economy. 

This move would also provide relief to demographic trends that are troubling for China’s growth. As China’s larger cities are home to many middle-aged workers, it’s estimated that nearly 50% of certain megacity residents could be over the age of 65 by the year 2050. If the current hukou restrictions are not loosened, the country is in danger of keeping the country’s future leaders barred from the larger cities and forcing them to seek permanent status elsewhere. This lack of long-term planning has the potential to devastate the country’s economy for future generations. 

Impact of COVID-19 on the China Hukou System

Despite the significant damage and challenges the global pandemic has placed on China’s economy, there has been an unexpected benefit of COVID-19 on China’s hukou system. The Chinese central and local governments have been more focused on carrying out hukou reform over the second half of 2020. As the economy is trying to recover, hukou reform may be a way to benefit from the economic boosts a reform can provide on both a local and national level. 

Without the proper hukou reform in place, it becomes difficult for migrants to return to their work in urban cities. With the COVID-19 pandemic disrupting for economic demand and supply, China has been forced to expedite the hukou reforms in order to alleviate the persistent issues that arise from migrant workers being required to live in separate cities from where they work. 

So from China’s perspective, stimulating the economy in a way that allows residential consumption to resume is going to be the better solution that investing in a more conventional stimulus plan. 

Goals for the China hukou

Currently, China is on track to hit its economic growth plan of 100 million new urban hukou holders. With additional measures being taken and city lines being reclassified, the government continues to be focused on achieving this goal it set in 2014.

Ultimately, the hukou system is complicated and presents both challenges and opportunities for its residents as well as businesses looking to expand into the country. To learn more about the complexities of the system, contact New Horizons today.

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