China's urbanization reforms will boost its economy

On April 8th, the Chinese central government announced its official paper, "Priorities in Urbanization Development 2019". Some commentators believe this document, if implemented, will draw a dividing line between the "old" and "new" style of China's development and will result in elimination of many traditions inherited over thousands of years for the social and political management of the Chinese nation.

Primarily, this official paper concerns the reform of the household registration system (Hukou in Chinese), which officially registers and identifies a person as a resident of an area, and holds information such as name, parents, spouse, and date of birth.

Until recent years the household registration system served the government well as an effective tool for social management. It was part of an integrated system encompassing public education, healthcare, employment and distribution of rations. Furthermore, Hukou has effectively built China into a dual society with public services and social security benefits distributed differently between rural and urban sectors.

In the old days, when a peasant visited relatives in cities he or she needed to hand over a pass issued by their hometown government to the local government where they were visiting.

The authority and effectiveness of this household registration system has dramatically reduced since the start of reforms in 1978, as tens of millions of migrants have been encouraged to seek jobs in cities. However, some of the key elements of it still remain functioning including provisions that prevent rural migrants from settling in cities. For example, children of rural migrant families are denied access to public schools in cities, and migrants have to pay more when visiting public hospitals in cities because their rural healthcare coverage is vastly insufficient compared to the coverage of urban residents.

Calls to end this discriminatory household registration system have been loud high from time to time in the past, but two concerns have prevented any fully implemented action.

First, it has always been a worry that massive influx of migrants into big cities would intensify problems ranging from escalating housing prices, traffic congestion, and crime, to pollution.

Second, the household registration system, which assigns rural residents a block of land in rural areas, has always been considered a safety net capable of accommodating the return of migrant workers when the urban economy runs into trouble.

The notion of having a "balanced development between big cities and small-medium cities" has had the upper hand when urbanization is one of the highlighted drivers of the economy.

However, such efforts have been contradicted by the actual movement of people and capital, which are mainly heading to the southeastern coastal regions. Consequently, while prices for land and property have skyrocketed in major coastal cities, an oversupply of empty industrial parks and ghost cities has become common in the central and western regions. The insufficient use of land and capital has contributed to a rapid increase in the debt level of local governments, and this has become a huge financial burden to the Chinese economy.

The issuing of of "Priorities in Urbanization Development 2019" indicates a change of direction. It stipulates that cities with a population of one to three million should completely abolish restrictions prohibiting rural migrants from settling down in cities. Cities with a population of three to five million should be fully open to rural migrants and assist their settlement.

These new policies effectively mean the end of the household registration system in most Chinese cities, except for a few megacities with a population over 10-20 million, such as Beijing, Shanghai, Guangzhou and Shenzhen. In addition, by removing restrictions on the movement of human resources, this policy another target: accelerating the formation of major city clusters: cities grouping together with those major cities as their core.

Take the Yangzi River delta as an example: Shanghai and another 15 industrial cites are located here. The growth of the international city of Shanghai is now constrained due to lack of land, overpopulation, congestion and pollution. One feasible solution is to shift some of Shanghai's functions to neighboring cities such as Suzhou, Wuxi, Changzhou, Jiaxing, etc. In such a way Shanghai and its neighboring cities can pursue differentiated and coordinated development.

Supporting the formation of such major city clusters in the most advanced regions has become the keynote of efforts to advance urbanization. The other Chinese regions nominated for city clusters are the Greater Bay District covering Guangdong, Hong Kong and Macau (Peal River Delta); the Beijing-Tianjin region; the Chengdu-Chongqing economic region, and to a lesser extent, hub cities such as Wuhan, Zhengzhou, Xian, Changsha, and Qingdao.

The second tier cities in those city clusters will be offered more land for industrial and commercial purposes to coincide with the expected influx of rural migrants. This expansion of both population and of business activities will stimulate investment, enlarge the tax pool for government benefit, and reduce living and production costs for residents and enterprises in those cities.

The impact on the rural sector will also be profound. With large numbers of rural residents departing for the cities, arable lands will be concentrated in the hands of the professional farm and agricultural businesses that have experienced rapid expansion in recent years. The efficiency of Chinese agriculture will improve substantially thanks to economies of scale and the use of advanced agricultural machinery and technology.

The activities mentioned above are actually part of a process reshuffling control of economic resources such as land – which is simultaneously a process of creation, distribution and exchange of wealth. It is particularly important to remember that those people whose land is being acquired are entitled to have fair compensation. Those rural migrants who seek work in cities must be able to lease their land and receive a good profit from that rental. Generation, distribution and exchange of wealth in such a way should translate into an expansion of domestic consumption and overall economic stimulation.

However, the challenges here are also acute. The free movement of people and consequent reshuffling of resources will put pressure on the social management abilities of government authorities. If the government's administrative arrangements and the legal and policing systems cannot manage the process in a fair and orderly manner, it will lead to chaos, corruption, resentment, disillusion and the formation of Mafia rings.