Ending long history of hukou

This year's Central Economic Work Conference could be historic. If its decision were effectively implemented, the half-century-old hukou system could be history. Set up in 1958 as part of the communization drive, the hukou - or residential registration system - has prevented rural residents from migrating freely to cities. In the official statement released after the meeting, the central authorities pledged to "push for urbanization in an active and steady manner" and to "solve the hukou problem of migrant workers". In an official conference held immediately after the central authorities' meeting, the National Development and Reform Commission (NDRC) announced a plan to study and form a policy next year for migrant workers' hukou.

It is interesting to observe this change amidst the current global financial crisis. The hukou system has long been criticized for its pervasive negative effects on people's welfare and economic efficiency, but has nevertheless remained intact except for sporadic and partial reforms. Then, why the change today?

It has a lot to do with the government's plan of structural adjustments for China's growth model. It is well known that China's economic growth in recent years has relied heavily on external demand. Various estimations place the contribution of exports to China's growth in the range of 30-40 percent. The financial crisis, however, shows that this model - if not unsustainable - is prone to damage from external shocks. China's export volume dropped by about 20 percent due to shrinking world demand, which means that China's GDP growth rate would have been 2-3 percent in 2009 if the government had not launched the large stimulus package.