In 2012 China’s urbanisation became even more significant for the global economy, with Europe’s debt crisis
and the US and Japan struggling to maintain growth leading many to regard Asia as the saviour of the world economy. Today the ‘China dream’ is more vivid than ever, with another 300–400 million people expected to relocate to China’s cities in the next 15 years. This urbanisation is presaged to cause a surge in Chinese consumers, and countries like Canada and Australia are increasingly betting their future on selling their commodities to China.

Assertions about the huge potential of the Asian market are based on the assumption of a rapidly rising middle class, and have fuelled hopes for a global rebound. It is widely claimed that by 2030 Asia’s middle class will total 2.5–3 billion people, about 50 per cent more than the entire global middle class today.

Not surprisingly, China is a big part of that Asian consumer growth scenario. For example, Brookings Institution analyst Homi Kharas has forecast that China’s middle class will surge from about 150 million in 2010 to about 670 million in 2021, a leap of about 520 million in a span of slightly more than a decade.

Yet China continues to face many problems associated with re-balancing its economy away from investment and exports toward domestic consumption. Does urbanisation necessarily mean China’s middle class will expand, raise the consumption share and make the Chinese economy run more sustainably? Where, exactly, will the newly prosperous half billion people who will join the Chinese middle class in the next decade come from?

In other developing countries major gains to the middle class are traditionally found among rural migrants arriving in cities. When migrants leave farms to move to urban jobs, they receive a higher wage and can afford to consume more. By trading their farm jobs for industrial or service jobs in the city, migrants can live in apartments furnished with appliances and occasionally eat out. In time, their children may go to college. Such is the familiar ‘urbanisation as an engine of consumption’ story.

Yet this story overlooks China’s special set of conditions, especially how the rural–urban divide is buttressed by such institutions as the hukou, or household registration system.

Under this system, peasants are allowed to go and work in the city but they are barred from acquiring an urban registration. In 2010, only about 460 million out of 666 million Chinese urban dwellers had urban hukou status. The remaining 206 million are mostly migrants who live and work in cities but retain their rural hukou status. This labour force with rural hukou has supplied China with a huge pool of cheap labour, and this has largely driven the phenomenal boom of the last 30 years. But the majority of these migrants and their families are prevented from enjoying the benefits of urban prosperity because without urban hukou they cannot access public education, public housing or social security programs in the city. This exclusion causes the income gap between rich and poor to widen.

Upward mobility through migration to the city is largely blocked by the hukou barrier. The notion that urbanisation is the path to prosperity is premised on most migrants’ being able to move up eventually. To follow that path, China will have to start treating rural migrants as equals in the city by granting them urban hukou, so they can enjoy the same rights and opportunities as natives.

There is a broad consensus for more hukou reform. Of course, it would be unrealistic — perhaps even reckless — to dismantle the hukou system overnight, nor would it be desirable to continue the current slow pace of reform. Phasing out the hukou system in the next 10–15 years is not only reasonable and workable, but also very desirable. Many of these new migrants have greater aspirations to stay in the city. They are better educated than their parents, are far more aware of their rights and the unsatisfactory conditions in which they live, and are demanding change.

In order to phase out the hukou in the next decade and a half, China will have to speed up reform by granting urban hukou to between 15 and 20 million migrants every year, a figure that is far greater than what has been done in the last decade. In February 2012 the central government renewed its modest hukou reform effort by announcing migrants would be able to apply for hukou in cities except the largest 40.

This is a good small start, but not enough. Thorough hukou reform will also be needed in the largest 40 cities, where most migrants congregate because that is where most jobs are. Moreover, it would be grossly inadequate to only let local governments try out piecemeal and limited reforms within their own jurisdictions. The central government also has to lead the way because serious hukou reform in those large cities will inevitably involve interregional fiscal, population and administrative issues.

The last 30 years of Chinese economic growth have been achieved through an urbanisation model that has produced a rather skewed social structure. Hampered by an obsolete hukou system, that model has also constrained the growth of the middle class and consumption demand. A major overhaul is needed to unleash China from that shackle, urbanise its way to prosperity — and take the rest of the world along with it.

Kam Wing Chan is Professor at the Department of Geography, the University of Washington.

A version of this article was first published here in China Daily.