Stamping the internal passport
Urbanisation, a key driver of economic growth in China, is set to be boosted by a new government policy. The National Development and Reform Commission (NDRC) has recently announced a significant change in its residency registration system, known as Hukou.
We believe major policy amendments such as this announcement are significant because they can inevitably act as drivers of structural growth
The Hukou household system is effectively akin to an internal passport which controls the movement of labour and the allocation of human capital throughout the country. The system traces its history back to agricultural land management during the Shang Dynasty. However, it has maintained contemporary relevance as the means of an individual accessing social welfare benefits (including education, healthcare, and pensions) in the specific place where they are registered as living. Migrants who lack a local Hukou, therefore pay more for social services and have been prohibited from buying property in that area.
Smaller cities win
Smaller and medium-sized cities are designed to be main beneficiaries of the initiative. The 2019 plan requires that cities with populations between one and three million will lift the restrictive residency registration system to encourage rural citizens to move to them. Moreover, for cities with populations between three and five million, the government will also lower the threshold of residency requirements and remove limits on key population groups, such as university graduates.
Targeting the benefits
By relaxing the country’s residency rules, the Chinese government hopes to achieve several objectives. Firstly, it is expected to boost the current urbanisation rate, but in addition, reinvigorate cities which have experienced net outflows and ageing populations. This should also address an uneven distribution of labour – typically young and educated workers, converging disproportionally on China’s largest ‘Tier 1’ cities.
Secondly, improving social equality is an obvious subtext for the Chinese government. The existing Hukou restrictions have inevitably meant that migrant workers from rural areas are unable to access the same social benefits as their urban-registered counterparts, thus marginalising a large proportion of the country’s ‘floating population’. Social problems and reduced productivity have typically been cited as notable side-effects of the system.
There is also an expectation that the new policy will stimulate greater consumption. Urban populations have far larger disposable incomes and a higher propensity to consume, so bolstering city numbers should act as significant driver of economic growth.
Consumption is much higher in China’s urban populations
Average consumption expenditure per household in Chinese urban and rural regions from 2007 to 2017 (in yuan)
The investment perspective
The liberalised movement of labour and the social-reform elements of the policy should be beneficial from an economic perspective, as well as being positive for individuals and companies. However, the effects of this reform will also be impactful across a vast range of sectors. In particular, the requirements of increased urban populations will be a notable driver for physical and real assets such as infrastructure, real estate, utilities and essential services.
As such, we believe there are numerous companies held within the Asia Long-term Unconstrained portfolio that are likely to be a beneficiary of the change in Hukou. Guangdong Investment is a case in point. The company provides water to Hong Kong, Shenzhen and Dongguan, giving it a stable core income business. But it also has a strong property portfolio in Guangdong province which is well placed to benefit from ongoing urbanisation in the region. Likewise, ENN Energy an early private-sector mover in China’s city-gas industry, is well positioned to enjoy the benefits of increasing gas volumes from higher urbanisation as well as the country’s change in energy mix from coal to gas. Similarly, Dairy Farm, a food, home-furnishing and beauty retailer with excellent franchises across China, should benefit on two counts: an increase in its urban customer base as well as higher rates of personal disposal incomes.
We believe major policy amendments such as this announcement are significant because they can inevitably act as drivers of structural growth in the region. However, as bottom-up active managers we always view these changes through the lens of our company-specific research.
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