The Hukou System and Challenges of Urban Integration

Key Insight

China's rapid urban population growth figures are somewhat misleading due to the definition of 'urban.' Reclassification of rural land accounted for 42 percent of the urban population increase between 2000 and 2010, alongside 43 percent from migration and 15 percent from natural increase. City administrative boundaries often encompass vast rural areas; for example, Chongqing, sometimes called 'the largest city in the world,' is a territory the size of Austria with a 29 million population that is 70 percent rural. Shanghai, with an urban core population of 22 million, is China's true largest city. The greater problem, termed 'partial urbanization' by Chinese scholars, stems from the widely disparate living conditions for urbanites, largely due to the hukou (residence registration) system.

The hukou system, originating from a modern version established in 1958 based on the Song Dynasty baojia method, assigns individuals a place of registration and categorizes them as rural or urban. Historically, during the Maoist era, strict hukou enforcement made it nearly impossible for rural residents to migrate to cities, causing the urban population share to fall from 20 percent to 18 percent between 1960 and 1978. While enforcement relaxed in the 1980s, allowing migrant workers into cities, they were largely prevented from bringing dependents or accessing social services. Currently, nearly 40 percent of China's urban population, approximately 260 million people, live and work in cities but lack entitlement to social services like public schools, medical care, and proper housing, often residing in substandard conditions.

The hukou system distorts labor flows, as economically vibrant cities like Beijing and Shanghai have restrictive immigration policies, diverting migrant workers to smaller cities with temporary construction jobs but lower long-term productivity growth. It also creates significant social mobility barriers within cities, with migrant workers earning only about 60 percent of their urban, hukou-holding peers' wages. Even children of migrant workers face discrimination in housing and upward mobility, unlike in South Korea where rural migrants quickly integrated. Reforms to the hukou system, ongoing since 2001, have been slow, challenged by the need to balance fiscal pressures on cities with providing equal services and ensuring even migrant distribution. Policymakers' preference for social control often overrides economic logic, as evidenced by continued tight controls on migration to cities over 5 million, potentially hindering innovation and productivity growth in major urban centers. Efforts now focus on a 'residence permit' system, delinking social services from hukou, with pilot programs in several cities using point-based systems, but nationwide implementation requires central government standards and improved fiscal transfers.