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Under the Banyan Tree - China's urbanisation 2.0
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Could spending by migrant workers move the needle for Chinese GDP? Chief China Economist Jing Liu says yes, thanks to a new government policy that broadens the social safety net.
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Transcript
Impact of Migrant Workers on GDP
00:00:00
Speaker
migrant workers might be more willing to spend if they know they can rely on the public health care, public ah rental housing, etc. And if we assume their savings rate will come down by about 10 percentage point, that's already about 0.8 percentage point boost to GDP.
Urbanization 2.0 and Domestic Spending
00:00:30
Speaker
Hello and welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, here in Hong Kong. On today's show, we're talking about new plans for mainland China's 200 million migrant workers and ah what they could mean for domestic spending in a wider economy. It's all part of a major shift called Urbanization 2.0. And joining me here to discuss all of this is our chief China economist, Ching Liu.
00:00:57
Speaker
From HSBC Global Investment Research, you're listening to Under the Banyan Tree.
Urbanization and Hukou System Challenges
00:01:13
Speaker
Here's a little bit of context to set the scene. Nearly 70% of mainland China's population now live in cities, they're urbanized. In 2002, that was only 40%. So that's a quarter century ago, that was substantially lower. Of that 70%, nearly 300 million people, and that is almost the size of the population of the United States of America, do not have what is known as a hukou.
00:01:40
Speaker
That's the household registration system that actually lets them to settle in area, get access to public services, hospitals, schools, and these sort of things. The government wants to change that. And I'd like to talk with Jing about what this means for the overall economy. So, Jing, welcome to the podcast. Thank you for having me, Harold. So, recently we've seen an announcement on this Gouko system, and that seems to be really, really big. So, I will really want to talk about the implications, but let's take a step back.
Understanding Hukou and Migrant Challenges
00:02:08
Speaker
What is a Gouko, and do you have one? Yeah, hukou is um the household registration. For example, I was born in Chengdu. I should register my hukou in Chengdu, and then I will be entitled to different kind of services in Chengdu.
00:02:25
Speaker
So when you you you now live here in Hong Kong, do you still have a Chengdu hukou? No. When I left my hometown in the early two thousand I already gave up my hukou, which means now if I go back to Chengdu, I wouldn't be able to access access to the public hospital, etc., etc. Now, this is important because you have a lot of these migrant workers, people that in the past used to live or originated, say, in the western part of China. They went to the eastern part of China where the factories are. having a work and of course they got married there and they stayed there but they don't have a hook call.
Educational Barriers for Migrant Children
00:03:00
Speaker
Basically it's a registration card if you want to put it like that. So how does that then work?
00:03:05
Speaker
Let's say you have a migrant worker, he falls sick, goes to a hospital and he can't get in, he doesn't get any treatment. How does this work? Well, technically speaking, they cannot easily get the public medical health care. yeah They need to get treated and then wait until they return to their hometown. They can get the reimbursement, etc. So it could be a very lengthy process. And if you need immediate service, you have to just pay for yourself.
00:03:31
Speaker
Yeah, essentially, yes. And it's the same with schooling, I presume. You can't get your children into school. Yeah, public schooling, at least ah in terms of the priority, won't be given to the migrant worker um and their families. This is is especially an issue when kids need to go to middle school, senior high, when they need to um take the national exam for college administration.
00:03:57
Speaker
So it's really important to have hukou. And I presume when you had to give it up, it was ah kind of a big decision in that sense. Yes, indeed. Yes, exactly. I can imagine. So that Hukou system that was always in place in in China, and now they want to change it, right? So what are you going to change
Transition to Residency-Based Services
00:04:15
Speaker
it with?
00:04:15
Speaker
So basically, hukou used to be the gatekeeper for who's eligible for certain benefits. yeah um But now the idea is let's look at who actually live here. So it's ah changing from hukou-based public service to residence-based public services. So you can get a residency card. So this is important. So the guy who, what we you spoke about, the imaginary migrant worker who for example, breaks his leg, couldn't get into the hospital or had to pay for the surgery himself first and then maybe reclaim it. Now, if he's registered in the city, he could just walk into the hospital and he will fall under some scheme and people will treat him and the payments can be settled by insurance. Yeah, ah so now if they show they are the resident of the city living here for, let's say, six months or longer, even if they don't have hukou, they are eligible for public services, including hospital, public schooling, and even they are eligible for public rental housing.
00:05:15
Speaker
Okay, let's take a look at these migrant workers.
Evolving Employment Trends of Migrant Workers
00:05:18
Speaker
Very often we have a bit of an idea that these are people that work in construction, road repair, these sort of things, on the lower end of the income scale. But you just told me that's actually not the right picture anymore.
00:05:30
Speaker
Yeah, that's right. In the early days, I think migrant workers actually predominantly worked in a construction and ah probably some assembly line. But increasingly, we see them also working different kind of service industry. For example, if you see somebody deliver your food in Shenzhen, most likely that a delivery man or woman would be a migrant worker. Okay,
Savings Behavior of Migrant Workers
00:05:54
Speaker
okay. But you told me that these people's savings rates are way higher than, say, people that have a hookah that live in the city and can make use of the benefits. Is that correct? Yeah, indeed. It's quite counterintuitive. First of all, the median salary for the migrant workers are actually slightly higher than the urban resident with hukou. But when we look at their savings rate, the migrant worker actually save more than 50%.
00:06:23
Speaker
Wow. More than 50% of the income. Yes. And I can imagine why they do this. Because if you need to pay for your own surgery of your leg or you can't get your children into a normal school so you have to pay for some kind of classes elsewhere, you want to be prepared, right? So these are the precautionary savings. Yes, indeed. That's like ah close to 20 percentage point higher than the urban residents with hukou.
00:06:46
Speaker
Wow. And okay, so now they've changed that system to a PR ah system.
Infrastructure Needs for Migrant Support
00:06:51
Speaker
this This migrant worker, the delivery guy in Shanghai, for example, now gets registered. He's a resident of Shanghai. He can go into schools or his children can go into schools. He can go to the hospitals all nice and well, but the government has got to pay for this. you need These cities now need more hospitals and these sort of things.
00:07:08
Speaker
Are they well prepared for this? Yeah, I think ah we see a recent study by a government think tank associated with a National Development and Reform Commission, which estimated that for every one percentage point increase for this ah residence in the urban area, that will cost the government about 110,000 renminbi.
00:07:33
Speaker
And it's not all the upfront ah cost. Upfront cost will be more associated with provision of public school, um maybe public rental housing, but the pension is a big chunk of that. That will be more back-loaded. and So to some extent, you're right, that means more spending. But at the same time, that also represents a shift from in the old days, a lot of government spending associated was associated with infrastructure. um Nowadays, more associated with investment in human beings.
00:08:08
Speaker
Fantastic. So let's take a very quick step back. In the past, you had the Huco system whereby if you had it, you could make use of the city's facilities. Now they're changing that because a lot of people just didn't have it were in the place that they lived in.
Economic Reforms and Savings Rates
00:08:22
Speaker
the migrant worker. It is one of the reasons why savings rates are so high, actually, in China. So they're changing that system now that has major implications for how the Chinese are going to save and how they consume and therefore what sort of growth you generate and how governments are going to finance this. So this has got some really big long-term macro implications. And I suggest we take a quick break now, and then I'd like to really delve deeper into that.
00:08:47
Speaker
Yeah, sounds good.
00:08:50
Speaker
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00:09:05
Speaker
Now, back to today's episode.
00:09:12
Speaker
So, Jing, here we are back again talking about who goes into the new registration system. But as I highlighted before the break, this is going to have some major implications, right? I guess the first one I'm looking at is the savings rate.
00:09:24
Speaker
Chinese, on average, have an incredibly high savings rate, and it's actually not really coming down. So, will this impact the way they save and therefore how they consume? Yes, indeed. We basically can estimate ah once the migrant workers and whoever living in the city without the local hukou might be more willing to spend if they know they can rely on the public health care. they can rely on the public school, public ah rental housing, etc., then they will be more willing to spend. And if we assume their savings rate will come down by about 10 percentage point, closing half of the gap with the urban residents, that's already about 0.8 percentage point boost to the GDP by 2030. And if the gap is completely closed, then that will be 1.3 percentage point boost to GDP only through the consumption chain. Yeah, because there's, I mean, as we mentioned earlier on, there's about 300 million people that now have a saving rates over 50%, as you mentioned. So they might bring it down to where everybody else is, which is maybe 35, 48, something like that. So that means there's a ah lot of additional spending that could be freed up gradually over the course of the next couple of years.
00:10:47
Speaker
I guess it's also where they're going to live and housing, these sort of things, right?
Population Shifts to Tier Two Cities
00:10:52
Speaker
Yes. um So again, we think the cities and regions with net population inflow will benefit. um That will include ah more developed ah regions such as the Yangtze River Delta region, Greater Bay Area, Jingjingji, and other more developed city clusters. This also comes at a time – you're talking about people moving a bit because it's now easier to move. It also comes at a time when a lot of people moving into their 60s in China. China is becoming ah an age society. And what we've, I think, also seen and we've spoken about in the in the luxury podcast once that people in the tier one cities – so that's Beijing, Shanghai. Hangzhou probably and Shenzhen, the bigger cities, people are moving more inland because their children found jobs inland. Factories have moved inland. And yeah, they're at an age where by the same, I'm going to take care of my grandchildren, right? And so it's cheaper to live in in in these cities a little bit further inland, a better place to retire. You're closer to your family, your grandchildren. So some that's another sort of migration trend at the stage. Yeah, indeed. um I think basically the tier two cities, mostly the capital cities of the provinces, um they seem to be very attractive in terms of a better work-life balance, more affordability. So over the past several years, when we look at the data of urbanization, those tier two cities attract more population inflow than the tier one cities.
00:12:19
Speaker
So I guess this is going to be ah great if you're a migrant worker, but per capita consumption in China, mainland China, is about the levels of Colombia and it's not really consumer economy
Government's Structural Solutions
00:12:33
Speaker
whatsoever. So could this be really a structural shift?
00:12:37
Speaker
I believe so, because whenever we see the soft print from activity data, somebody will call for cynical stimulus. But we can see that Chinese authorities seem to always lean towards structural solution. This is a structural solution they have in mind. Instead of a one-off big stimulus, they think it makes more sense to have a better social benefit provided such that people will have less precaution saving and more willing to
Sectoral Impacts of Reforms
00:13:10
Speaker
spend. well
00:13:11
Speaker
So this is going to impact consumption sectors. This is going to impact property. This is going to impact construction. This is going to impact actually finances, banks, all these other things, right? So this is potentially a really big story. We'll have to see how these things develop, how they will be implemented, what the timescale is. So I'd love to get you back at some point in time to to pick this up again. But I found this really super interesting. Thanks a lot for joining us on the podcast, Ying.
00:13:35
Speaker
Thank you, Harold.
00:13:39
Speaker
Well, that's a wrap from all of us here in Hong Kong. Thank you as ever for joining us. And remember to subscribe wherever you get your podcasts, including on YouTube. Under the Banyan Tree is an HSBC Global Investment Research production from all of us here in Hong Kong. Take care and we'll talk to you again very soon.