Will China’s latest urbanization push work?

China’s leaders have long sought to lift their people out of poverty and drive overall economic growth by encouraging migration from rural to urban areas, where people can find better jobs, earn more, and spend more. But, to prevent big cities from being swamped with migrants, the government has also restrained internal migration through multiple policies. The ruling Communist Party at its recent major meeting—usually referred to as its third plenum—released plans to relax some of these restrictions to spur more movement, particularly to smaller cities with fewer than 5 million people. These measures represent a notable shift away from some outdated features of China’s labor, land, and fiscal systems. Success, however, could depend on clearing two potential hurdles—the party’s lack of a strategy for generating the jobs needed to attract rural migrants to smaller cities and the potential resistance of local government authorities who would face fiscal challenges serving growing populations in those areas.

Attempts at reform

Party officials at the plenum set a goal of raising the urban share of the population by residence from just over 66 percent in 2023 to nearly 70 percent in the next five years. Officials estimate that every percentage point increase in the urbanization rate is associated with more than 200 billion yuan (roughly $28 billion) of additional household consumption per year and over 1 trillion yuan (or about $140 billion) in one-time new investment. To be clear, officials’ worries about “urban diseases” like traffic congestion and potential social instability in large cities have not gone away, which is why this new urbanization push focuses primarily on small and midsize cities, instead of megacities like Beijing and Shanghai, which continue to have population caps. As part of this new urbanization effort, the State Council announced a five-year action plan with three major components—changes to its household registration (hukou) system, certain land rules, and certain tax and spending practices.

First, the government would ease aspects of China’s hukou system, which identifies an individual as a resident of a certain area. One’s hukou status determines where one can receive public services, especially housing, education, and health care. Traditionally, rural migrants have been unable to obtain a new status, and hence access to these services, in the cities that they have moved to. Under the new plan, hukou restrictions in cities with fewer than 3 million people will be eliminated, while those in cities with 3 million to 5 million people will be further relaxed. The central government is also encouraging cities with over 5 million people to abolish their annual hukou caps and let all migrants who meet certain requirements acquire local residency permits. All urban residents regardless of their hukou status, including migrant workers who have held a stable job or lived in cities for at least six months, will be able to access social services and enroll in welfare programs in the cities they live in.

The hukou changes will allow more migrants to gain urban residency, and their demand for housing could potentially alleviate the property slump. A 2016 study by scholars at the Chinese Academy of Social Sciences finds that abolishing hukou-based access to services could reduce migrant workers’ precautionary savings and substantially encourage consumption.

Second, rural residents’ land rights and interests will be protected, even after they switch their status to urban residency, removing one reason not to move. Rural landowners will be able to use their property for a greater range of commercial purposes, potentially opening up a new channel for them to build wealth. New land supply, which is allocated by the central government, will be linked with actual population flows, which means top-tier cities with net population inflows will receive greater land supply quotas, while smaller cities that are shrinking in population will have less or even no land supply quotas. 

With these changes, the government has acknowledged there are two land markets in China—one with undersupply in top-tier cities, where there is a housing affordability crisis, and the other with oversupply in lower-tier cities, some of which have turned into “ghost towns.” The new policy should allow for more rational distribution of land supply to different cities.

Third, local governments will potentially receive more tax revenue and be relieved of some spending obligations. The government will shift its point of collection for the so-called consumption tax (which is actually an excise tax in China despite its name) from the point of production to the point of wholesale or retail sale, most of which occurs in wealthier, big cities. The revenue, which used to be collected entirely by the central government, will be partly collected and retained by local authorities.

This should incentivize local governments to steer policy towards stimulating consumer spending. Additionally, the central government will take over some spending responsibilities from local governments and channel more money into localities that receive more migrants. Local governments will likely obtain a greater share of certain central-local shared tax revenue, like that of value-added tax. These fiscal changes could ease urban authorities’ fiscal burden in providing social services for new residents.

Together with other measures on affordable housing, retraining, and employment assistance for migrant workers, this policy package represents a potentially promising effort to tackle several key issues. It may prove disappointing, however, if officials fail to address two big hurdles—job creation and local government resistance.

Major urbanization hurdles

Ultimately, China’s migrant workers will go where the jobs are. The third plenum plans included no explicit strategy to drive job creation in China’s smaller and midsize cities for low-skilled rural migrants. If anything, Beijing set its sights on fueling high-tech innovation over the long term, which requires advanced education, expertise, and other skills that most rural migrants lack. The incentives are structured such that local governments will rush to launch industrial parks associated with strategic industries like artificial intelligence and chipmaking, regardless of actual comparative advantage. Indeed, the plenum’s vague reference to building a “strategic hinterland” suggests that there might be government support for shifting advanced manufacturing activities away from their traditional locations along the coast to less urbanized areas in China's interior.

Previous generations of rural migrants found better-paying factory jobs in the cities as China became a global manufacturing powerhouse and later found abundant construction work during the country’s property boom. But those two areas are unlikely to be major creators of low-skill jobs in coming years as manufacturing has become more automated, the economy is struggling with excess manufacturing capacity, and housing surpluses remain in the hinterland. 

Rural migrants possibly could find jobs constructing the new high-tech factories and industrial parks or in providing low-skill services for the coming tech workers. Maybe this is the party’s implicit plan, but it does not offer a concrete pathway for moving up the income ladder. Plenum documents refer to the need for training, but research suggests that existing programs have done little to re-skill migrant workers for new job opportunities.

Another potential hurdle is that these new policies may not be enough to win the support of local city governments in a weak economy. China’s poorer localities might push back on the consumption tax reform. They still might not collect enough tax revenue to pay for the social services that swelling numbers of rural migrants will need. The shift in the point of tax collection could hurt smaller cities where things are produced, while benefiting big cities where they are consumed. The current tax primarily applies to a small set of products, including tobacco, alcohol, and luxury goods: High-income, big city residents spend more on such goods than do households in smaller cities.

Think of Guizhou, for example, a rural province that is also one of the most heavily indebted in the country. Most of China’s makers of high-end baijiu, a popular liquor, are located there, meaning that the province would have received some of the tax revenue under a shared central-local consumption tax system, if collection had been retained at the point of production. It might receive less revenue under the new system, as collection shifts to where the drink is consumed. The change might therefore exacerbate the fiscal woes of places like Guizhou and lead to local resistance, unless such places can be compensated through other channels.

Bolder thinking?

The Communist Party’s plans represent a good start at addressing the issues that have held back migration to cities, but they are likely insufficient. Leaders need a better strategy to revive economic activity and create well-paying jobs in the smaller urban areas where they want to see population growth. The central government also should consider taking on greater fiscal responsibility in providing public services to new migrants.

China’s continued state-led steerage of migration flows could amount to no more than tinkering around the edges. Instead of trying to direct rural migrants toward certain less well-off counties through administrative controls, why not allow more of a role for personal choice and market forces to let cities grow on a more organic basis? The party’s current strategy, as China scholar Jeremy Wallace has argued, is based on a political rationale aiming to maintain social and political stability. Policy based more on an economic rationale, as China embraced at times in its booming past, would let labor and private investment flow more freely, with less state input. That could potentially boost productivity, wages, and economic growth overall, while improving the lives of the people expected to migrate.