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Successful implementation of reforms to China’s Hukou household registration system could give payment firms access to millions of new customers. However, vested interests of the existing system could hold back progress.
The China Banking and Insurance Regulatory Commission (CBIRC) looks set to introduce new financial inclusion guidance, that is estimated to affect more than a quarter of all migrant workers in China, equivalent to tens of millions.
In a notice, the regulator mentions nine proposals. These include: expanding the supply of financial products and services to migrants, particularly basic bank accounts; expanding financial education; strengthening financial support for areas that attract rural migrants; and working with local governments to implement this.
However, although these proposals seem relatively straightforward, there are a number of market specific challenges that will add complexity to Chinese regulator efforts.
The Hukou social divide
The Chinese Hukou (户口) or household registration system is an internal passport, owned by all families that separates households into urban and rural. In its modern form, it acts to disincentivise migration of whole families from the countryside to the cities by restricting access to public services.
Without an urban Hukou for a particular city, a rural migrant is unable to access the health, education, welfare and most financial services from that city. This is because a person's access to services is linked to the Hukou designation of their parents at the time of their birth. This means migrants are only eligible for those services in their hometown, not where they currently live.
The World Bank's latest financial inclusion data estimates that 20 percent of China's population is unbanked. Many of these citizens will be based in rural areas. If they migrate to urban areas for work, they will not legally be able to open a bank account in that city, nor use payment services such as WeChat Pay or Alipay, which also require a bank account.
Not only do migrants have to get by without these public services, the lack of public health and education facilities incentivises families to split up, forcing the breadwinner to work in the city and leave their family behind, relying on non-bank remittance services.
Reform, therefore, has been on the central government’s agenda since at least 1984. However, there are multiple different parties, including rural migrants themselves, that have an interest in impeding this reform.
Vested interests
A paper by the Congressional Executive - Commission on China found evidence of discrimination by local city governments towards rural Hukou holders, despite reforms by the central government. This is partly why efforts so far by central government to reform the system have not worked.
According to the World Bank, in 2014, the central government launched the National New-type Urbanisation Plan (2014-2020), and various other measures to reform the Hukou system. A central goal of these efforts was to close the urban social benefits deficit from 17.3 percent in 2012 to 15 percent in 2020. This modest target was not met, instead increasing to 26.6 percent.
Those cities that have opened up have also only done so for wealthy migrants that have lived there for a while, can hold a stable job and provide investment in the city.
Additionally, firms and local residents have an incentive to prevent reform, as companies can continue employing migrants without paying for social security, while urban residents face less competition for health or educational resources.
Coupled with the desire by central government to push migrants into smaller cities to increase local growth, migrants are increasingly faced with relocating with their families to second- and third-tier cities where job opportunities are lower, or continuing to go without access to most services while remaining in tier one cities such as Shenzhen.
Despite these problems faced by internal migrants in China, there are also incentives for many workers to keep their current rural Hukou.
At present, only rural Hukou holders can profit from farming, as well as selling land to local authorities for development purposes. According to an article by the Financial Times, to switch household registration, Mr Ran, a rural migrant, would have to give up his access to 13 hectares of forestry land in Qianjiang. Even if he made that sacrifice, his son would not be guaranteed a place in the public school near his rented apartment.
As COVID-19 forced factories in China to close down, rural Hukou holders were able to return to their farms and make a living, which would not be possible if they switched to an urban Hukou.
Impact on payments
The uncertainty of how reform might develop means there are multiple outcomes that could significantly affect which financial sectors benefits most from these new consumers.
For example, in the event of full reform where families from the countryside are able to live and work in the city with the same benefits, this could have a negative impact on the internal remittance market in China, as there would be reduced need to send money home.
If, however, migrants are merely able to benefit from greater financial services but must still live separated from their families, demand for remittances would continue but the market could open up to enable new players such as banks, payments firms and fintechs to compete for these consumers.
At present, the exact intentions of the CBIRC remain unclear, as the term “new citizens” that the regulator uses does not specify whether these migrants must already have an urban Hukou, which would prevent millions from benefitting.
However, given the emphasis on working with local government and supporting areas that attract migrants, this could suggest an indirect strategy of helping relieve the pressure on services in affected areas, incentivising local city governments to grant more Hukou changes.
If successful, reform could greatly benefit millions of urban migrants with access to lower cost payment services, helping further grow the digitalisation of the Chinese economy.
