◎ The hukou relaxation policy could prove to be a double-edged sword for the CCP.
On April 8, China’s National Development and Reform Commission (NDRC) issued a circular on relaxing household registration (hukou) limits in bigger cities and boosting infrastructure spending this year.
The new hukou policy aims to “provide strong support for maintaining sustained and healthy economic development and overall social stability,” according to the circular. The NDRC’s larger goal is to push 100 million people into the cities by 2020.
Key points in the circular include:
- The NDRC will scrap hukou restrictions for those looking to migrate to tier two cities with a population size of 1 to 3 million;
- The NDRC will “comprehensively relax” hukou restrictions for cities of 3 to 5 million, including many tier one cities. Restrictions for certain targeted groups will also be removed;
- Oversized megacities need to adjust their settlement policies to take in more migrants;
- Long-term residents living in city rental housing without hukou will be given residency to settle;
- Long-term residents without residency will gain access to basic public services and benefits;
- The central authorities will provide financial and infrastructure support for the urbanization push.
The Chinese regime’s latest urbanization plan comes amid the recent introduction of seemingly contradictory population migration policies and unsustainable property price fluctuations.
The backdrop:
1. On April 25, the Shanghai E-House Real Estate Research Institute published a research report on housing prices in 100 cities in China in the first quarter of 2019. The report listed 11 cities as having prices in the “super high” range (over 20,000 yuan per square meter) and 20 cities in the “ultra low” range (below 8,000 yuan per square meter; lowest price was 5,106 yuan per square meter). Twenty-three cities were listed in the “overheated” price range (prices up by over 20 percent year-on-year).
2. On April 19, the Politburo of the Chinese Communist Party held a meeting to discuss China’s current economic situation and economic work. The Politburo’s statement issued after the meeting devoted just 49 Chinese characters to real estate:
- Homes should be used for living in and not for speculation;
- City governments are responsible for implementing and regulating their own housing policy (一城一策).
3. On April 16, the National Bureau of Statistics published sale price changes of residential units in 70 medium- and large-sized cities in March. Sixty-six of the cities saw price increases from a month ago. The cities that saw the greatest property price increase are, in descending order of highest to lowest, Xi’an, Hohhot, Dali, and Guiyang (all second and third-tier cities).
4. On April 14, housing prices in fifth tier cities in Heilongjiang fell to so-called “cabbage prices” (very low prices), causing great concern among observers. In March, the average property price in Heilongjiang’s Hegang City was 1,240 yuan per square meter, while housing in some small districts were on sale for less than 20,000 yuan (about 300 to 400 yuan per square meter).
5. Over 20 of China’s first- and second-tier cities (including Beijing, Nanjing, Dalian, Xi’an, Changzhou, Suzhou, Wuxi, Guangzhou, Haikou, Fuyang, Zhenjiang, and Shijiazhuang) have been waging a “talent war” in the first quarter of 2019, according to mainland media reports. Cities that announced talent policies in April are offering skilled people, professionals, or those with graduate or postgraduate degrees (“high-level personnel”) relaxed settlement programs, subsidies for purchasing housing, and other preferential benefits.
- On April 16, the Wuzhong Economic and Technological Development Zone in Jiangsu’s Suzhou City issued a policy that would reserve a certain number housing units for out-of-town talent (high-tech workers or “high-level personnel”) each year. The reserved housing would be offered to the talents at discounts of as much as 30 percent.
- On April 18, Inner Mongolia’s Hohhot City local government announced that colleges who graduated in the past three years or those with postgraduate degrees can purchase apartments at half-price.
- On April 21, Zhejiang’s Ningbo City announced a talent policy where “high-level personnel” could receive housing subsidies of up to 600,000 yuan.
Our take:
1. Several of China’s problems—a worsening economy; the impact of demographic shifts on the property bubble; systemic financial problems; rising unemployment; biflation; urbanization versus rural poverty woes—are gradually coming to a head.
We believe that the CCP is relaxing its household registration policy to cope with China’s economic slowdown and prevent the bursting of the property bubble. Also, the CCP seems to be sacrificing the small cities (tier-four and below) to concentrate resources in preserving or rescuing the economies of medium- and large-sized cities.
2. China’s demographic crisis has been brewing for years:
- Decades of implementing the one-child policy wrecked population growth in China. In January, a Chinese think-tank warned that “the era of negative population growth is almost here.” And since 2011, China’s labor force has been declining rapidly, a trend that has exacerbated China’s economic deterioration and imbalance.
- Imbalance in China’s economic development has resulted in the migration of young Chinese adults from the north, central, and western regions to the metropolitan areas of the Pearl River Delta, the Yangtze River Delta, and the Beijing-Tianjin-Hebei region.
- In 2018, the resident population of Guangdong increased by 1.77 million people. Guangdong’s population has been growing by more than 1 million people for four consecutive years, or more than Jiangsu (214,000 people), Zhejiang (800,000 people), and Shandong (414,000 people). Guangdong, Jiangsu, Shandong, and Zhejiang are the top four provinces by GDP in China.
- In 2018, the provinces with the most severe population outflows include Anhui, Sichuan, Hunan, Jiangxi, Hubei, and the northeastern provinces.
- In comparing data from China’s fifth and sixth population censuses, net migration out of northeastern China (Liaoning, Jilin, Heilongjiang) totaled 2.19 million people between 2000 and 2010. The average annual net outflow from northeastern China was 200,000 people, and outflows will likely increase exponentially in the future.
- According to the official “Heilongjiang Statistical Yearbook,” the province’s Hegang City saw its population decrease from 1.1126 million people in 2001 to 1.0095 million people in 2017 (minus over 100,000 people).
The new hukou policy will inevitably result in a “siphon effect” the movement of people to the medium and large cities will be accelerated. The imbalance in economic development across regions will become starker.
3. China has relied on the property market for growth in the past decade. Land sales have also been an important source of revenue for local governments, while over 80 percent of Chinese citizens’ wealth is parked in property. Further, most of the real estate is concentrated in medium- and large-sized cities.
Given the importance of the property market, the CCP will make it a priority to prevent the bursting of the property bubble. Relaxing hukou restrictions can help medium- and large-sized cities to prop up the housing bubble to a certain degree. Stepping up infrastructure works is another “tried-and-tested” way to guard against property price drops. Failure to stop the bursting of the property bubble could trigger a systemic financial crisis that will see the devaluation of the renminbi and skyrocketing commodity prices.
4. The CCP’s hukou system, which was implemented after it established the People’s Republic of China, essentially binds people to their regions in a sort of modern day “serfdom.” Historically, the CCP has always sacrificed the interests of farmers to advance industrial development and ensure urban supplies. Most notoriously during the “Great Chinese Famine” (1959 – 1961), a period which overlapped with the Great Leap Forward (1958 – 1962), the CCP introduced policies which saw tens of millions of peasants starve while urban residents remained “sheltered” from the worst of the famine. Likewise, the current relaxation of hukou restrictions appears to be aimed at “sheltering” the big cities from the worst of the economic downturn at the expense of the small cities in less economically developed (and in most cases, more rural) parts of China.
There is no contradiction between relaxing hukou restrictions to facilitate urban migration and the new “Down to the Countryside Movement” because both policies target different groups of people. The new “Down to the Countryside” policy is aimed at sending low-skilled workers (the so-called “low-end population”) away from the cities to alleviate the cost of “stability maintenance” while curbing political risks. Meanwhile, the hukou relaxation policy looks to attract talented people (“high-level personnel”) to the cities where they can use their disposable income to buy housing and preserve the property bubble.
5. We believe that the hukou relaxation policy could prove to be a double-edged sword for the CCP.
On the one hand, the flood of people to the cities could help to prop up the property bubble and postpone the coming economic crisis.
On the other hand, the property bubble will continue to expand, the debt ratio of residents will keep rising, and China’s real economy will be further harmed. Moreover, the unemployment situation in urban areas could worsen as businesses fail and foreign companies withdraw from the mainland.
Get smart:
China’s economic policies are intertwined with the CCP’s priorities. Without a deep understanding of Party characteristics and operations, businesses and investors can be misled by the CCP’s economic illusions. What may look like an opportunity could turn out to be an unjustifiable risk.
