China Gets Anxious Enough to Choose Worker Freedom

Beijing last month announced a new relaxation of the hukou system of residence registration. Workers who have moved to urban areas from the countryside will be able to enroll their children in schools near their new homes and gain access to government-funded healthcare. It’s one of the bigger steps Beijing has taken to liberalize this system.

Readers may be surprised these things weren’t already allowed. For decades, Beijing has attempted to thwart the development of a single national labor market. The hukou system emerged in the late 1950s to keep rural workers in place, in an attempt to stop cities from being flooded by poor rural migrants.

It hasn’t worked. Urbanization, as both a cause and consequence of economic development, is as insistent a natural force as flowing water. The proportion of the Chinese population living in urban areas swelled to around 66% as of 2024, up from 19% in 1980, at the start of China’s reform-and-opening-up era. The trend has further to run, given that urbanization rates in fully developed economies hover around 80% or above.

The main effect of hukou registration requirements has been to make it harder for the urban poor to reap the rewards of economic growth. The system creates an underclass estimated at between 200 million and 357 million workers who face obstacles putting down official roots in the cities where they live.

The economic effects of this are difficult to parse. Many Western economists assume that reforming the hukou system is necessary to unlock more domestic consumption, itself a requirement for China’s transition from a failing export-dependent growth model. This argument runs that because quasilegal internal migrants lack access to the social safety net, they save too much for a rainy day. By reducing the need for excessive household saving, hukou reform would increase consumption as a percentage of gross domestic product by 0.6 percentage point over five years, recent research from the International Monetary Fund argued. That sounds modest but isn’t, as these things go.

Overall, this line of thinking seems not quite right. One oddity of any discussion of China’s economy is the persistent presumption that saving is a bad thing in a still-developing economy with enormous scope for productive investment. Really, the constraint on Chinese growth is chronic malinvestment of the country’s savings, which are diverted toward export-manufacturing industries and low-productivity state-owned enterprises rather than toward investment in domestic services and the like.

Hukou reform, then, may well be good for Chinese workers, but it isn’t going to fix the real savings problem. It may not even slow rates of saving at all, since amid slowing economic growth and mounting pessimism, households have plenty of other reasons to batten down their financial hatches.

It’s better to think of the latest hukou measures as a social or political reform rather than an economic measure. The prospect of annual growth below 5% for an extended period is ratcheting up Beijing’s anxiety about a slow-growth economy’s political consequences. The hukou reform is of a piece with Beijing’s decision in 2023 to stop publishing data on youth unemployment because the numbers had become so embarrassing. Absent a way to boost growth to lift young Chinese’s fortunes, the government tried to paper over the problem.

So it is with China’s belated attempt to bolster the financial security of, and basic social fairness toward, poorer households. No two things are as dangerous to an authoritarian regime as a large cohort of educated but underemployed young people, or a large mass of disappointed urban laborers.

Hence a new push on hukou reform, though how far that reform goes in practice is in question. In recent decades Beijing has loosened the rules for rural migrants to smaller cities, but the reforms tend to be implemented unevenly, and the largest cities typically are excluded. Serious reform would require a major reorientation and rebalancing of local-government finances within China. While rural regions appreciate having to pay less for social services for departed migrant workers, urban governments resist having to pay more. Cities’ complaints are more urgent now, as some jurisdictions may not be able to afford the burden. China’s ongoing property-market deflation has created a hidden debt crisis for many local governments that once relied on revenues from real estate.

Which makes this reform push a model of the growth challenge Beijing faces. China’s economic slowdown risks significant political and social consequences the regime may struggle to manage and that could get ugly. Still, this is all the more reason to cheer one of the rare occasions when the government’s solution is an expansion of freedom for hardworking Chinese migrants.