24 October 2016
Economist Stephen King said China's "hukou" system restricts worker mobility that can help fuel economic growth. Photo: Bloomberg
Economist Stephen King said China's "hukou" system restricts worker mobility that can help fuel economic growth. Photo: Bloomberg

Easing rural-urban wealth gap key to China growth: HSBC

A senior adviser to HSBC Holdings Plc (00005.HK) has called for an end to China’s household registration system, saying it restricts worker mobility that can help fuel the economy by boosting incomes and growth in poorer regions, Bloomberg News reports.

If China maintains the “hukou” system, economic expansion would slow to below 6 percent for the next 15 years or, even worse, a 1990s Japan-like slump, warned Stephen King, senior economic adviser to Europe’s largest bank.

King said curbs on labor movement “placed huge restrictions on economic opportunity for those in poorer regions”.

Removing them can help China’s poorer provincial economies expand at a faster pace, boosting overall national growth in future.

“Some have concluded that the game is now up for the Middle Kingdom,” King said. “The possibility of continued catch-up in the poorer areas implies that, for China as a whole, the pace of economic expansion could remain relatively robust.”

By ensuring that poorer provinces such as Guizhou in the southwest and Gansu in the northwest expand at rates exceeding about 8 percent over the next 15 years, the nation can expand at 6 percent to 2030 even as wealthier places including Beijing, Tianjin and Shanghai slip below 4 percent expansion, he said.

China’s catch-up potential is underscored by the extent of income inequality in the nation.

The richest Chinese region enjoys living standards that are four times greater than the poorest, King said.  

In the United States, by comparison, the richest state is less than two times richer than the poorest and in the eurozone the richest country is three times richer than the poorest, he added.

Ending the household registration system would “transform the labor market”, slowing wealthier regions’ wage growth but helping the nation overall by utilizing the workforce more efficiently, King said.

China has vowed to deepen and speed up reform of the household registration system.

Introduced in the 1950s, a hukou provides access to services and social welfare based on a person’s residential status, leaving many migrant workers and their families who have flocked to China’s coastal regions in the past three decades without the rights of those born in the cities.

Among other failings, the system is a key reason behind high precautionary savings levels which act as a brake on consumption.

Hukou reform could stall if growth slows because of earlier excessive investment and financial sector strains with potential productivity gains failing to materialize, King said.

Growth then would average well below 6 percent over the next 15 years, he said.

Under King’s most pessimistic scenario, an economic collapse in the nation’s wealthier regions would trigger a financial crunch leading to the cancellation of infrastructure investment projects that had promised a lifeline for poorer provinces.

Under that scenario, “China enters a sustained period of much lower growth, similar to the disappointments Japan suffered in the 1990s and beyond,” he said.

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