Friday 11 April 2014

Understanding Chinese Consumption: The Impact of Hukou

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.

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