Rebalancing hinges on China increasing consumption. It has long been acknowledged that the Hukou system is an institutional blockage on consumption driven rebalancing. This new working paper looks at this important issue.
Understanding Chinese Consumption: The Impact of Hukou
BOFIT
Discussion Paper No. 7/2014
CHRISTIAN
DREGER, German Institute for Economic
Research (DIW Berlin), European University Viadrina Frankfurt (Oder),
Institute for the Study of Labor (IZA), Chinese Academy of Social
Sciences (CASS)
TONGSAN
WANG, Chinese Academy of Social Sciences (CASS)
YANQUN
ZHANG, Chinese Academy of Social Sciences (CASS)
Capital investment and exports have driven China’s remarkable
economic growth for decades, but recent trends have put pressure on the
government to move to a more consumption-driven model of growth.
Unfortunately, China’s institutional framework does little
at the moment to spur household consumption. While the country’s weak
social security setup and highly regulated financial markets are
routinely cited as disincentives to private consumption, the role of the
hukou household registration system in depressing
consumption gets less attention. Controlling for income levels on
datasets from 2002 and 2007, we show the average propensity to consume
is significantly lower for internal migrants to cities. Official figures
suggest that China in 2013 had about 260 million
internal migrants. These individuals are often separated from their
families for long periods and denied access to public services in the
cities where they work. The government’s current urbanization strategy
calls for increasing migrant populations in cities,
which, in the absence of hukou reform, is likely to further dampen
consumption.