Standard Life Investments

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China’s migrant challenge


Internal migration has played a massive role in China’s economic development over the past three decades. To fuel growth, the Chinese government relaxed Maoist restrictions on the flow of labour, allowing surplus rural workers to fill the booming coastal factories. However, the government has continued to keep in place the household registration (hukou) system that assigns a permanent residence at birth. Although allowed to work in cities, migrant workers are prevented from permanently settling in urban areas. This group of floating labour has grown rapidly over the last 30 years, increasing to 273.95 million in 2014, and make up as much as a third of China’s total workforce. Without an urban hukou, these internal migrants often lack access to basic services, such as healthcare, social security, education, housing, and decent job opportunities. This lack of access to services is often cited as a reason behind China’s high savings rate and low consumption share of GDP.

Migrant wages have begun to converge on urban incomes, as China’s labour surplus diminishes (see Chart 10). However, large gaps continue to exist between migrants and urban residents; and the continued use of the hukou system will only exacerbate the inequality. The government recognises that this system is untenable for a modernising economy but has, so far, failed to introduce any serious solutions. Reforms introduced last year failed to remove restrictions on cities where people actually want to relocate but, instead, opened up migration to cities where restrictions were already relaxed and scant migration demand exists. The bulk of migrants are located in first-tier cities and have no interest in moving back to their village or relocating to a tier-three city. Removing discriminatory policies would increase their disposable income and, thus, further the goal of rebalancing through consumption-led growth. However, full removal could lead to a backlash from one of the CCP’s strongest constituencies – urban elites.

In the short term, migrant labour flows and wages are a good indicator of economic and labour market conditions. Given the flexibility of hiring and firing migrant workers, short-term fluctuations in economic growth are often exhibited in migrant flows. Weakness in real estate or manufacturing would be clearly exhibited in slower migrant worker flows as they are the most vulnerable employees when business slows. According to the IMF, growth in migrant flows is strongly correlated with GDP growth, with a 2ppts growth in GDP reflected in 1ppts growth in migrant flows. Migrant flows have been structurally slowing over the past four years, reflecting both the decline of surplus labour but, also, structural shifts in the economy. However, the sharp drop in Q1 and weak rebound in Q2 suggest migrant workers are finding fewer opportunities in the cities and/or dismayed at the higher living costs (see Chart 11). This massive pool of underserved, floating labour provides an interesting window into the Chinese economy. As China attempts to rebalance, it will be the fate of this young, often-educated urban underclass that could decide the outcome of China’s reform plan. Well-calibrated policies can unlock new sources of domestic demand but continued marginalisation of migrants could stymie progress and increase social tensions.

Alex Wolf, Emerging Markets Economist, Standard Life Investments

First published in Hong Kong Economic Journal November 2015