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Tired of tariffs? Let’s talk Hukou

MIKE REYNAL 10-Jun-2019

Suffering from headline fatigue? Between tariff talk and watching the markets vacillate like a sine wave with every tweet, perhaps energy is better spent learning about something potentially constructive for long-term emerging markets investors: the imminent reboot of hukou.

Established in its current form back in 1958, hukou is China’s system of household registration. But the census-like concept actually dates back thousands of years as a means for controlling the population and enforcing taxation. More recently, however, hukou has been a lever for central authorities to manage migration and regulate access to public benefits based on residency status. Urban residents (non-agricultural) typically have access to benefits not available to rural (agricultural) dwellers. In fact, having a Beijing, Shanghai or Guangzhou hukou can be very valuable because it may allow residents access to public services, pension, education and healthcare benefits that are far superior than those provided to official residents of smaller cities.

Not surprisingly, this system has been criticized widely as unfair to both Chinese citizens and businesses because it creates inherent economic inequalities while also inhibiting the mobility of skilled labor. Ultimately, this has been acting as a hurdle to building a more urban and consumer-driven economy. On top of that, it traditionally has been a bureaucratic headache to convert one’s hukou.

The good news is that on April 8th, the National Development and Reform Commission (NDRC) published its urbanization plan for 2019. It stated that cities with an urban population of less than three million should scrap the hukou this year, while cities with a population of three to five million should “comprehensively relax permanent residency requirements.” For now, top-tier cities will maintain their population-control measures but should improve the mechanism to allow domestic migrants to settle within their jurisdictions.

Why does this matter to investors? These concrete hukou reforms will facilitate urbanization and create new opportunities through a better-flowing economy. Given the powerful link between urbanization and growth, the move can be an additional reason to remain optimistic about China’s outlook this year. Furthermore, it demonstrates China’s steadfast commitment to continuing the transition from an export-driven economy to one that relies more on domestic consumption to sustain growth. Thus, the hukou reboot just might act as an enduring stimulus for the world’s second largest economy.

International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty, and greater volatility. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. You may lose money by investing.