Is China easing hukou rules to revitalise real estate market, initiate labour reforms?

Is China relaxing its strict regulations further to rejuvenate its real estate sector?

A downturn in China’s property market has prompted the easing of some constraints on its inflexible household registration system, potentially allowing for a more flexible approach to labour migration. Under a programme known as hukou, more than 20 cities are now permitting individuals from any part of mainland China to alter their official residency status.

In China, household registration is linked to social benefits, and migrants can transition their status in these urban areas by purchasing a home in the city.

What is hukou?

Hukou refers to the household registration system in China. It’s a system that officially identifies and records the whereabouts of Chinese citizens, tying individuals to a specific geographic location (usually their place of birth or where their family is registered). Hukou registration is crucial for accessing social services such as education, healthcare and employment opportunities within China. It has historically been used to control internal migration and population distribution in China.

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Since its establishment in 1958, the hukou system in China has categorised all citizens into either “agricultural” or “non-agricultural” hukou statuses tied to specific locations. Over time, the system has become increasingly complex. Since the 1980s, China has decentralised the management of hukou and the policymaking related to it, shifting authority from the central government to local governments at the city and town levels.

According to the South China Morning Post report citing a study by property researcher China Real Estate Index System, the rules governing hukou registration, which historically limited population mobility and are often cited as contributing to China’s urban-rural divide, have been eased for home buyers in cities such as emerging centres like Hangzhou and Nanjing.

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Addressing the barriers created by this system has remained a persistent challenge throughout China’s decades-long reform process and it has garnered renewed attention ahead of the Communist Party’s Central Committee economic-focused third plenum scheduled in two weeks.

Local governments are experimenting with various approaches to attract potential homebuyers such as simplified re-registration processes that grant access to comprehensive urban services like education and healthcare, which typically exceed those available in rural areas.

With the exception of Hainan province and five major cities—Beijing, Shanghai, Shenzhen, Guangzhou, and Tianjin—most other population centres on the mainland have also piloted similar incentives, the South China Morning Post report said.

According to data from the National Bureau of Statistics, over 66 per cent of the Chinese population lived in urban areas last year, but fewer than 50 per cent were officially registered as urban residents.

Hukou and its drawbacks

The hukou system in China presents several significant drawbacks.

Firstly, it reinforces a stark urban-rural divide by granting urban hukou holders better access to social services, education, and healthcare compared to their rural counterparts. This disparity perpetuates social inequality and limits opportunities for rural residents to improve their economic and social standing. Secondly, the hukou system imposes strict migration restrictions, particularly disadvantaging rural residents who seek to move to urban areas for better job prospects. Migrant workers often face discrimination, lack of social benefits and uncertain legal status further exacerbating their marginalisation.

Additionally, the system can lead to family separation when members move to urban areas but cannot change their hukou status, causing difficulties in accessing basic services and education for their children. Economically, the hukou system hinders labour mobility and efficient allocation of human resources, potentially impacting overall economic growth. Moreover, critics argue that the hukou system infringes upon individuals’ rights to freedom of movement and residence within their own country raising human rights concerns. Despite recent reforms aimed at easing some restrictions, the entrenched nature of the hukou system poses challenges to meaningful reform efforts and continues to be a subject of debate and scrutiny.

In an article titled “What should economists know about the current Chinese hukou system?” on Science Direct, author Yang Song argues that the current hukou system in China adversely affects rural-to-urban migration, economic efficiency and equality by diminishing the anticipated benefits of migration.

In his piece China’s Hukou System and the Urban-Rural Divide, Max Masuda-Farkas highlighted economists Holger Sieg (University of Pennsylvania), Chamna Yoon (Korea Advanced Institute of Science and Technology), and Jipeng Zhang (Southwestern University of Finance and Economics). They emphasised that indigent rural migrants face formidable barriers to obtaining permanent Hukou status in large cities, hindering access to economic opportunities and educational advancement.

As a result, most rural migrants are relegated to temporary or transitory Hukou statuses, which afford fewer privileges than permanent residency, limiting access to essential public services like healthcare, unemployment insurance and housing funds. Local governments have erected numerous obstacles including barring migrant children from quality public education and, in some areas, preventing them from taking college entrance exams.

Future of hukou

China’s recent adjustments to its hukou system mark a significant step towards addressing longstanding disparities in urban-rural opportunities. The reforms aim to enhance labour mobility, stimulate the housing market and mitigate social inequalities by easing residency restrictions in select cities and promoting real estate incentives. However, challenges remain in achieving equitable access to social services and economic opportunities for all residents, underscoring the ongoing need for sustained reform efforts and careful management of urbanisation dynamics in China.