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China ‘needs reform’ to boost urban spending

China must overhaul its rigid household registration and land systems to spur urbanisation by unleashing the spending power of millions of migrant workers, according to a senior Government researcher.

China’s leadership, led by new Communist Party chief Xi Jinping, has pledged to improve urbanisation by turning saving-oriented rural workers into free-spending urban residents, which current registration rules effectively inhibit.

The urbanisation drive will focus on boosting consumption rather than investment, said Li Tie, head of China Centre for Urban Development, a think tank under the National Development and Reform Commission, the country’s top planning agency.

“The new urbanisation drive is about improving public services, and it’s a process of transforming from quantity-focused growth to quality-focused growth,” he said.

Consumption-driven growth is regarded by many economists as a more stable development model for China than the investment-driven path trodden so far, which the International Monetary Fund says stokes over-capacity and inefficiency.

Migrant workers drive China’s economy, but a lack of access to education, health and other services tied to the country’s strict household registration – or ‘hukou’ – system forces massive saving, restraining Beijing’s efforts to shift growth’s focus to consumption from investment.

China’s migrant workers are relatively low-paid, but have earned annual double-digit pay rises for years, making them a huge potential source of consumer spending.

The system means an officially rural resident has no access to education, health and other welfare services in the towns where they live and work, even though they may have been there for years. About 158 million migrant workers have entered cities from the 250 million-strong rural workforce.

China’s official urbanisation rate is about 51 per cent, but the real level, if rural migrant workers are excluded, is only around 35 per cent, Li said, echoing a widely held view among academics.

The Government redistributes public resources among Chinese cities to make smaller cities more attractive to migrant workers, Li said.

China must also improve the current land rights system, under which local governments get the lion’s share of land sales revenues, while farmers get little,he added.

Many local governments in China are reluctant to push forward the hukou reform as they fear that an influx of rural workers would be far too expensive.

But Li argued that the cost of absorbing rural workers would be under control as social security and pension contributions could be shared by companies and individuals, while education could be partly funded by private investors.

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