China’s change of leadership comes at a precarious time for the world economy. Europe is still trying to find a politically sensible solution to the eurozone crisis; the US is at the edge of the fiscal cliff. The adjustment in the developed world is likely to take many years, possibly the rest of this decade. For China, this means that fast export growth will be permanently sealed in the historical drawer.
Challenges inside China are no less demanding. The 18th Chinese Communist party congress pledged to double Chinese per capita income by 2020. This is a modest goal when judged against historical records. However, several factors may make it a challenging aim in the rest of the 2010s. Facing an export slowdown, China needs to enlarge its domestic market. However, there is no clear sign that household consumption will increase as a share of the economy, after more than a decade of decline. China’s labour force will peak in 2015; after that, China has to rely on technological progress and human capital to generate more growth. Manufacturing, China’s growth engine, will probably reach a peak in terms of its share in the economy sometime between 2015 and 2020. Change is afoot.
It seems that the new party leadership has noticed. The 18th congress has highlighted several reforms to address these challenges, among which the reform of the hukou system, or the household registration system, is the most significant. This system was introduced in 1958 to restrict labour mobility, especially migration from the countryside to cities. In effect, it confines a person’s legal residency to his birthplace. However, 240m people, including 160m with rural hukou, do not presently live in their birthplaces.
In fact, a new hukou policy was announced in February 2012. Through this new policy, migrants in small cities can apply for local hukou if they have a stable job and a place (including a rented home) to live. Migrants in medium-sized cities can do the same if they have worked and lived in the same city for three years in a row.
This policy, if it is implemented, will greatly boost domestic consumption for two reasons. First, rural migrants save much of their income because they have to prepare for going back home someday; giving them urban hukou will stabilize their expectations and allow them to consume more. A rough calculation shows that China’s household consumption would be increase by 4.2 percentage points as a share of GDP if the consumption level of rural migrants were increased to the average level of city-based Chinese.
Second, migrants will bring their children and parents to the city once they get the urban hukou. A larger urban population will provide a larger market for services, a sector very much underdeveloped and with the potential to fill the gap left by the falling share of manufacturing in the second half of this decade.
In China, leaders are not elected. But political cycles still exist. Market-oriented reforms between 1978 and 2002 had increased the efficiency of the Chinese economy, but also left the country’s social security system shattered and its countryside untended. In the last decade the Hu Jintao-Wen Jiabao government took serious steps to rebuild the social security system and to increase investment into the countryside, especially in its education system.
In a sense, this government has turned the country toward the left. It is thus reasonable to expect that the next government of Xi Jinping and Li Keqiang would go back to the reform track. The political report of the 18th congress did not mention the payroll reform, a mandate carried out by the current premier Wen Jiabao in the hope to correct China’s enlarging income inequality. Clearly, the next leadership does not want to continue the left-leaning policies of the current administration.
There are daunting challenges for the next leadership if it wants to carry out the reforms spoken of during the 18th congress. There is still no concrete plan to implement the hukou reform, eight months after its announcement. Both local governments and local residents are against the reform. Local governments believe that accepting the migrants would greatly increase the burden of local public finance, and local residents believe that migrants would endanger their children’s chances of education and shrink their already tight living spaces. Unlike previous reforms that brought clear gains to the society and only burdened isolated groups of people, the hukou reform does not bring immediate gains but poses clear and immediate threats to the interests of a majority of the population.
It will take great courage and political wisdom for the new leadership to gather proper supports for the reforms pledged by the 18th party congress. The motion has been set out; now we wait for real actions.