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This article was first published by Stratfor Worldview and is reprinted here with permission.

The smaller cities surrounding China’s largest urban centers are altering the local household registration, or"hukou," system to attract skilled labor in a tight market, while avoiding reforms that might shift China’s industrial base further inland. Without full hukou reform, China’s persistent rural-urban income divide will inhibit the expansion of its consumer base and threaten the political stability that Beijing relies on for its governing mandate. Since late 2020, the cities surrounding Shanghai in the Yangtze River Delta have resorted to passing limited, local reforms to China’s hukou system to attract skilled labor, which tends to pool in major cities like Shanghai and Beijing. In March, Suzhou — a city of 13 million that abuts Shanghai to the West — started allowing college graduates to receive a local hukou without making requisite social security payments. On June 15, local Suzhou officials also began focusing the city’s labor recruitment efforts on artificial intelligence and welding talent. For Suzhou, these and other recruitment efforts have resulted in over 16,000 residents of the city’s industrial park receiving local hukou status in the last year. Other nearby cities like Hangzhou, Nanjing and Wuxi (each less than 170 miles from Shanghai) have also announced similar hukou reforms targeting skilled labor. 

  • The hukou system assigns Chinese citizens with rural or urban residency, and specifies in which city or small town a Chinese citizen may live, work and collect social benefits (e.g. public education, health insurance and social security).

China’s smaller cities will continue passing modified hukou reforms to attract talent from China’s coastal metropolises, as an overhaul of the system would result in labor shocks and increased financial burdens for provincial governments. Beijing has long found it challenging to reform the hukou system because of the potential for rapid labor migrations and resistance from cash-strapped city governments. One of the focuses of China’s 14th Five-Year Plan (FYP) for economic development, which was released in March, is reforming the hukou system so China's 400 million rural migrants, who are mostly blue-collar or low-skilled workers, can work unimpeded by hukou status in China’s smaller cities (those with fewer than 3 million people). These proposed reforms would also ease hukou restrictions in both middle-sized cities (3-5 million people) and, to a much lesser extent, China’s large cities (more than 5 million residents). If implemented fully, the reforms would also help reverse China’s flow of labor into cities like Shanghai and Beijing, sending them instead to China’s smaller cities and its poorer inland provinces — thus alleviating coastal crowding and distributing China’s economic development more evenly across the country. Hukou reform, however, will take years (if not decades) to implement. China is also highly unlikely to fully abolish the entire system anytime soon for fear of prompting an unmitigated flow of labor into China’s already crowded megacities, causing major disruptions to China's semi-planned economy and hindering Beijing's goal of broadly distributing economic development. In the meantime,  China’s smaller cities like Suzhou will, in turn, continue jostling for a limited supply of skilled labor, thus taking the good and leaving the bad (i.e. providing social safety nets for unskilled rural migrants) from Beijing’s national hukou reform plans. Should Beijing double down on hukou reform as laid out in the 14th FYP by pushing labor into China’s smallest cities and its most undeveloped inland provinces, the industrial makeup of China could shift dramatically — pushing low-end manufacturing into China’s interior and allowing high-end manufacturing and services industries to spread in coastal megacities like the Yangtze River Delta.

Until Beijing can establish new inland manufacturing bases and better access to the rural consumer base, the rural-urban income divide will fuel unrest and hinder the even distribution of China’s economic development. Suzhou and its neighbors are just a few of the countless cities attempting to mold hukou reform to suit their local economic needs, thus similar labor incentive programs are likely propagating in China’s other megacities, like the areas surrounding Beijing and Tianjin to the north and Guangzhou and Shenzhen to the south. Though these programs increase labor competition on China’s coasts, they leave China’s inland areas, with less resources and less attraction for migrants, out of the industrial boom. With localities using limited hukou reforms to fight for skilled labor, major cities will continue to avoid providing social services for rural migrant workers. This will ultimately provide fodder for domestic political unrest by exacerbating the income divide that separates China’s urban and rural populaces