Changes to China’s Hukou System Simplifies Internal Mobility

China’s newly lifted restrictions on internal mobility, known as hukou, will make relocating to city centers for jobs easier for the employee and the employer.

China’s recent changes to its residency requirements will have notable effects on the internal mobility of Chinese residents. Known as the hukou system, China’s decades-old residency permits are often required to move internally within the country. China announced earlier this year that the requirements to obtain residency permits in smaller cities (also known as “second-tier” cities) will be curbed, particularly for college graduates in an effort to help support new business development. At the same time, the Ministry of Human Resources and Social Security will simplify the employment process and offer insurance subsidies in rural areas. 

When China introduced the hukou system in 1958, the People’s Republic of China was heavily agrarian. To speed up industrialization and be financially competitive in a changing economy, China underpriced agricultural goods and overpriced industrial products. To sustain this unequal balance, it restricted the free flow of labor between the city and countryside. Throughout this process, individuals were issued a rural or urban residence category, which required them to stay within their designated region. The result was restricted access to certain jobs, food, healthcare and education, unless the individual had a government-issued hukou within an urban setting.  

Conversion of an individual’s hukou from rural to urban has been a notoriously difficult process and has resulted in illegal internal migration and adverse effects on the livelihoods of farmers. As China has progressed over the past few decades, so too has the hukou system, with major changes taking place in 1984, 1992, 2001, and the most recent developments announced this year. 

In China’s most recent National Development and Reform Commission report, it was stated that cities with a population under 3 million should lift all restrictions on new domestic migrants, and cities with populations between 3 and 5 million should comprehensively relax their residency requirements. Large cities such as Shanghai and Beijing are able to maintain some of their residency requirements while allowing for more people to settle within their jurisdictions. Smaller cities such as Hangzhou, Xian, and Shijiazhuang significantly altered their residency requirements, with the latter city, for example, completely lifting the thresholds for settlement.  

The efforts are part of China’s plan to raise the urbanization rate to 60% by 2020. It is estimated that local governments finance 80% of spending on health and education, and as a result, there could be a financial strain on local municipalities as new residents flock to urban centers. To address this challenge, China’s Ministry of Finance has allocated funds of 30 billion yuan (4.2 billion USD) to help rural migrants settle in urban areas. 

These changes will have a significant effect on job mobility of Chinese residents and their employers. According to Dezan Shira & Associates, the restrictions in the hukou system have historically made it more difficult to attract and retain talent. Employers are responsible for providing assistance to employees who are navigating the residency permitting system.  Such support typically comes in the form of hiring a legal team to guide the hukou conversion process or paying the necessary conversion fees on their employee’s behalf. Bureaucratic difficulties may arise, but nevertheless employers are usually able to provide incentive to employees who wish to move to urban areas by extending contract length, or offering social welfare compensation for those who wish to remain rural. With newly-lifted restrictions, employers will find greater ease in the relocation process and access to talent that is more easily attracted and retained. 

China’s ambitious urbanization efforts will have significant effects on the economy as rural residents move to city centers and tap into the jobs and social resources that come with dwelling in urban areas. The restrictions that have historically weighed down the process for employers moving their employees throughout the country are easing. This benefits not only the relocation managers but the employees, who now have greater freedom of mobility, and opportunity, within China.