China's Social System Reform is Going Nowhere

China's Social System Reform is Going Nowhere
Photo Credit: Cobris/達志影像
What you need to know

China’s hukou (household registration) system is often criticized for hindering the free movement of labor and creating inequality. In recent years the hukou system has undergone considerable reform. But is this enough to turn around the trends in China’s regional inequality?

In essence, hukou is a population recording system that the government uses to budget for social provisions. The differential treatment associated with different hukou statuses has implications for public finance and social insurance. Funding sources are organized locally by provinces or by cities depending on the type of services or benefits.

In 2003, China ended the practice of evicting migrants not registered with the proper hukou status by force. But since then, the social welfare benefits given to hukou migrants have been gradually reduced.

Before 2014, most social security coverages were linked to one’s hukou status, which meant that even if migrant workers had paid taxes in cities, they were not able to gain access to public services and welfare coverage there. For the labor exporting provinces — which are often less developed — migrant workers did not pay tax locally but came back to access social welfare coverage. In this sense, not only did the poorer parts of the country suffer from brain drain, they also subsidized the richer regions by paying for the welfare and social services of the migrant labor force.

For years, governments in the underdeveloped areas complained about this unfair treatment and called for "top-level design," by which they meant introducing a unified social insurance system nationwide. But this is easier said than done.

Income and living costs vary greatly across different regions. The gap can be big even between urban centers and peri-urban areas, not to mention between richer cities and poorer rural areas nationwide. In China, it is technically impossible to design a universal pension system with the same level of benefits throughout the nation. As a compromise, some large cities such as Shanghai and Guangzhou introduced layered social security contribution and entitlement systems, through which migrants holding rural household registration can contribute less and claim less.

Under the 2014 reform, these options do not have to be defined according to hukou status and all residents can choose from different social security packages. Across provincial boundaries, there is a growing understanding that there is no need to develop a single nationwide social insurance scheme. A portable welfare contribution record and an entitlement arrangement across regions, which does not trap the hard-earned money of migrants, are more realistic.

The pre-2014 hukou system merely reinforced policy biases in favor of cities against villages, coastal areas against inland areas, and larger cities against smaller cities. Social services such as education and medical care have become concentrated in larger urban centers. Rural and remote areas and even smaller urban centers do not have all the basic social services that people in large cities would expect.

Such gaps make large cities attractive to migrants who want to get the same opportunities for themselves or for their children. Fast increases in population have driven up house prices across cities in China. But people’s impression is that it is a lot easier to accumulate wealth in larger cities. As a result, more people want to move into these large cities in the hope that they can benefit from the better lifestyle, accumulate wealth quickly and create a better life for their children.

Right now, cities such as Beijing and Shanghai already have populations rivaling that of Australia. These cities, even with tight population control, find themselves facing some of the biggest governance challenges in the world.

Confronted with this situation, the Chinese government has tried to stop or even reverse the trend of population concentration in the largest cities. The approaches that have been tried to achieve this include tightly controlling migration into these cities. The 2014 hukou reform was partially designed to achieve this, which has so far been successful in Shanghai and Beijing but not in Guangzhou and Shenzhen. The government has also focused on developing new large cities that are equally or even more attractive than current cities, as well as satellite cities that are well serviced and adjacent to existing large cities.

At the beginning of the 13th Five Year Plan in 2015, achieving "real urbanization" was high on the government agenda. There were high hopes for hukou reform, but the actual policies implemented so far have turned out to be less progressive. In the largest cities such as Beijing and Shanghai, gaining hukou status has become even more difficult.

The government hopes that by improving services and prospects in other cities, tight hukou control can be more easily phased out. But successful "real urbanization" policies are nowhere in sight.

The News Lens has been authorized to republish this article from East Asia Forum.

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centerd on the Asia Pacific region.

Edited By: Edward White