How did China's urban-rural divide emerge?
How did China's urban-rural divide emerge?
Historical and societal perspectives on the root and impact of China's urban-rural inequality
In our previous article, we highlighted the significance of the household registration system ("hukou") reform discussed during the 3rd plenum of the 20th Central Committee of the Communist Party of China (CPC) in mid-July.
The reform is designed to facilitate urban integration for agricultural laborers by easing urban residency requirements and ensuring job security and equal rights. Focusing on education, housing, and social welfare, it aims to create a fairer and more harmonious society by 2029.
On August 12, a new draft revision was proposed to phase out the requirement for "hukou" or permanent household registration for marriage and lift the restriction on marriage registration locations, a policy that has been in effect for 38 years. This change is a complementary measure to the hukou reform, reflecting the government's commitment to easing restrictions on household registration and enhancing flexibility in population mobility (Beijing Scroll covered this topic).
The hukou reform is a critical shift, as it will influence the migration patterns of hundreds of millions in China. Over the past 30 years, China's rapid development has been driven by the massive influx of rural migrant workers into the southeastern coastal regions, forming the backbone of the Chinese manufacturing, construction, and modern service industries. However, the living conditions and social security of these workers in urban areas have often been overlooked.
In today's post, we will take a step back in time to analyze the origins and consequences of the dual urban-rural structure in China. The "dual" nature of this structure extends beyond social welfare systems such as healthcare and pensions—it also encompasses distinctions in household registration, land ownership, and income from agriculture. The divide between urban and rural areas is not only a result of institutional factors but also stems from historical inertia.
Below is Baiguan's translation of the original article (some paragraphs are abbreviated or redacted):
Urban vs. rural: a stark contrast in social security
In 2016, China abolished the distinction between agricultural and non-agricultural household registration, unifying all under the term "resident" as per the State Council's call for further advancing household registration system reform. However, this did not mean an immediate alignment of healthcare and pension systems between urban and rural areas—far from it.
Take pension insurance as an example. For urban employees, retirement pensions consist of a basic pension and a personal account pension. The basic pension is primarily determined by the average wage in the locality during the retirement year. The personal account pension is based on individual contributions; for instance, an employee earning RMB 5,000 per month could accumulate approximately RMB 4,800 in their personal account pension annually. After 30 years of contributions, they could receive RMB 2000~3000 per month upon retirement. In contrast, pensions for those with rural household registration also comprise a basic pension and a personal account pension. However, the basic pension here is tied to national standards, which in 2024 means a monthly amount of just RMB 123 for rural residents. The personal account is also not linked to wages and depends entirely on individual contributions. Assuming an annual contribution of RMB 1,000 ( there are still 600 million people with a monthly income of less than RMB 1,000), after 20 years, they would receive a monthly pension of RMB 153. Combined, this totals RMB 276 per month for rural residents—at least ten times less than their urban counterparts.
Similarly, in healthcare, China's medical resources are relatively scarce, with premium medical services concentrated in tertiary hospitals, where the top tier is known as "Level A tertiary hospitals" (or "3A" hospitals). Below these, there are five additional levels of medical facilities. Urban employees under the basic medical insurance scheme enjoy reimbursement rates of 90% for primary hospitals, 87% for secondary hospitals, and 85% for tertiary hospitals. In contrast, rural residents, who mainly participate in the urban and rural resident medical insurance scheme, face reimbursement rates of 90% for primary hospitals, 80% for secondary hospitals, and 65% for tertiary hospitals. This essentially prioritizes urban workers' access to top-tier medical resources.
Moreover, rural residents' medical insurance often includes limits on major illness reimbursement and a cap on maximum payments, while many urban employees enjoy no such restrictions. Additionally, the scope of diseases covered is far more comprehensive under the urban employees' insurance scheme. There is also a significant disparity in the range of reimbursable medicines between urban employees and rural residents.
You might be surprised to learn that the difference between urban and rural household registrations in China can drastically impact the compensation for fatalities in traffic accidents. In some cases, the compensation for urban residents can be up to three times higher than for rural residents. The standards for compensation in cases of disability or death are determined by the per capita disposable income of urban residents or the per capita net income of rural residents from the previous year, within the location of the court where the lawsuit is filed. Given the significantly lower net income for rural residents, the gap in compensation can be substantial. This loophole was not closed until May 1, 2022, when the Supreme Court enacted a revision to the law.
Beyond financial compensation, rural household registrations holders face significant challenges in urban areas, particularly when it comes to their children's education. Access to schooling, especially the right to participate in entrance exams, is severely restricted. According to a report by the Economic Observer, children of migrant workers, on average, transfer schools four times from primary to senior high school. Even if their parents obtain residence permits in cities, rural household registrations still prevent these children from participating in critical entrance exams like those for junior high and high school. This lack of continuity in education can severely affect the quality of their schooling, disrupting their academic progress and future opportunities.
The difficulties faced by rural household registrations holders permeate nearly every aspect of life. While it is impossible to list every challenge, these examples underscore the deep-seated inequalities that persist in Chinese society. A brief look into the history of the household registration system reveals that these burdens are not easily lifted, even with recent legal reforms.
The urban-rural divide: a historical continuation of governance logic
The classical household registration system dates back to the Registering Households and Standardizing Names in the Qin and Han dynasties (Baiguan Note: over 2,000 years ago), where people were bound to their localities and their movement was heavily restricted. It was once written in the Zhangjiashan Han bamboo texts:
Households ranked 'Five Dafu'* and below were organized in groups of five for mutual oversight and the use of token for verification. Neighbors monitored each other's actions, reporting any theft, robbery, or absconding to officials. Gatekeepers controlled access to the village, opening gates at set times and keeping them locked at night to restrict movement and activities.
—The Code of the Second Year: Household Regulations
*"Five Dafu" refers to a lower-ranking noble title in ancient China, awarded to individuals with certain merits, positioned between commoners and higher-ranking officials.
The passage describes a system where all individuals were confined to a residential unit called "li," with every five households grouped into a unit known as a "wu." Each "li" was surrounded by walls with gates ("li men") controlled by local officials ("li dian"), and there were specific times for opening and closing the gates. This semi-militarized management system enforced strict punishments for those who failed to adhere to the curfew or attempted to bypass the walls. The primary motivation for such rigorous control stemmed from the labor conscription system, where citizens were required to perform extensive public labor, such as road construction, transportation, and military service. In the context of the ancient world, this level of state control over its citizens was unparalleled.
The modern household registration system in China was established in 1951 with the Ministry of Public Security issuing the "Interim Regulations on Urban Household Registration" (now abolished). This was followed in 1955 by directives to implement a nationwide household registration system, mandating annual statistics for both urban and rural areas. The first comprehensive household registration regulation, the "Regulations on Household Registration of the People's Republic of China," was enacted in 1958, formalizing a system that classified individuals into "agricultural" and "non-agricultural" households.
At that time, migration was strictly regulated. Leaving one's registered residence required an introduction letter, and local food ration tickets had to be exchanged for "national ration tickets" to avoid difficulties elsewhere. In the 1960s, production team members would embark on extensive seasonal migrations, carrying their own tools, food, and firewood to work on infrastructure projects such as river repairs and road construction, often setting up camps many miles from home.
This system imposed greater restrictions on rural populations compared to urban residents. A critical turning point came in October 1953, when the central government began implementing a system of centralized procurement and distribution of agricultural products*. This move integrated agricultural economic activities into a planned economy framework. It allowed the state to control pricing of both industrial and agricultural products, creating a "scissors gap" that extracted surplus agricultural goods and cheap raw materials for industrial use. This facilitated capital accumulation for industrial production and provided cities with stable supplies of agricultural products and cheap labor, further advancing industrialization.
Baiguan Note:
A system of centralized procurement and distribution of agricultural products, known as the "Unified Purchase and Sale of Agricultural Products" and "Ticket-based Rationing System." Under this policy, farmers were required to sell their products to the state at fixed prices. In return, they received ration tickets, which they could use to obtain essential goods. This system aimed to stabilize food supply, control prices, and ensure the equitable distribution of resources while integrating agricultural production into the state-planned economy. It also allowed the state to accumulate surplus agricultural products and raw materials for industrial development, supporting the country’s broader economic goals.
Starting in 1980, private enterprises gradually gained freedom, leading to the migration of surplus rural labor into urban areas and the emergence of the migrant worker population. The central government then began guiding farmers to relocate to nearby towns, signaling a gradual movement away from their original registered locations. A pivotal moment in this transformation was the 1982 Constitution (Baiguan: the supreme law of the People's Republic of China) which stated in Article 10: "Urban land belongs to the state. Rural and suburban land, except for that legally designated as state-owned, belongs to collective ownership; homestead plots, private plots, and privately-owned mountains also belong to collective ownership." This established the dual land system separating urban and rural areas.
Several key factors contributed to the urban-rural divide:
1. Household registration distinction: The division between rural and non-rural household registration created significant disparities in rights and benefits.
2. Urban-rural supply gap: During the era of ration coupons, resources were scarce, and even in cities, supplies were limited. Rural areas often had no access to many essential goods.
3. Agricultural product procurement: The state's monopoly on the purchase and sale of agricultural products led to a "scissors gap," depriving farmers of economic benefits.
4. Dual land system: After the 1982 Constitution, urban land transactions flourished, benefiting urban residents through mechanisms like property demolition, while rural collective land remained largely stagnant.
Farmers left behind: non-responsive grain pricing squeezes rural incomes
The first significant relaxation during China's reform and opening-up was the loosening of the state-controlled procurement and distribution system. Following the introduction of the household responsibility system, the state gradually eased its grip on grain prices. By 1992, the central government had completely lifted its planned control over the production and distribution of vegetables in large and medium-sized cities, allowing a vast array of agricultural products to be freely traded in the market. Despite this move towards market liberalization, the state maintained a robust grain reserve system. In 1990, the State Council approved the establishment of the State Grain Reserve Bureau, followed by the creation of China Grain Reserves Corporation (Sinograin) in 2000.
In recent years, with increasing emphasis on food security and self-sufficiency in the three major grains—wheat, rice, and corn—China Grain Reserves Corporation (Sinograin) has steadily expanded its annual procurement scale. Historical data shows that by 2009, Sinograin's purchases accounted for one-sixth of the country's total grain production. After that, public data became scarce, but by 2015, estimates from trading institutions and internal experts suggested that China's stock-to-use ratio for staple grains had exceeded 50%, meaning half of the domestically produced grains were stored in reserves—enough to significantly influence market prices. Sinograin not only buys large quantities of grain but also uses its scale to regulate prices. If rice prices are too low, the company provides subsidies to farmers through a "minimum purchase price" to prevent them from being undercut. Conversely, if rice prices are too high, it releases stored grain to stabilize prices and ease the burden on consumers.
While the logic behind this system is sound—stabilizing prices to protect both consumers and farmers—the execution reveals a different story.
For example, the price of the most basic rice in China hovers around 3 RMB per kilogram. In contrast, in India, where per capita GDP is one-seventh that of China, the cheapest white rice costs approximately 7.8 RMB per kilogram. In Japan, with a per capita GDP nearly 2.7 times that of China, the price is even higher, at 20 RMB per kilogram.
Even when looking at domestic prices, the change in Sinograin's minimum purchase price for wheat reveals a significant disparity — from 0.72 RMB per kilogram in 2007 to 1.25 RMB in this year, a 1.73-fold rise. However, this increase pales in comparison to the growth in other economic indicators: per capita GDP has risen 4.72 times, nominal household income has tripled, and housing prices have surged 4.4 times over the same period.
This disparity can be attributed to several factors, including a pricing system that prioritizes urban price control over rural profits, and the massive scale of Sinograin, which allows it to dominate grain prices. Additionally, the government's emphasis on self-sufficiency has led to a significant increase in grain production. Since 2007, the area sown to grain has expanded from 1.288 billion "亩"mu (approx 858,709.6 square kilometers) to 1.499 billion mu (approx 999,333.3 square kilometers) in 2023, with grain output rising from 814.5 billion "斤" jin (407.25 million metric tons) to 1.2829 trillion jin (641.45 million metric tons). In this context, suppressing purchase prices is relatively straightforward. As a result, despite global grain price increases following the Russia-Ukraine conflict, China has become a price depression zone for grain.
Moreover, the minimum purchase price does not necessarily benefit farmers. According to a 2015 investigation by NetEase News, the so-called "market support price" is often paid to brokers controlled by Sinograin, rather than directly to farmers. These brokers, in turn, pay farmers the lower prevailing rural market prices. Farmers who attempt to sell directly to Sinograin face challenges such as being downgraded from first-grade to third-grade rice, or having their prices lowered due to alleged excess moisture content. Faced with these obstacles, many farmers prefer to sell to brokers to avoid the hassle of direct sales.
In this context, although China has officially abandoned the state-controlled grain procurement system, the presence of the strategic grain reserve and Sinograin's dominance means that farmers still do not fully benefit from market-driven supply and demand dynamics. The grain income system remains constrained, limiting the economic gains that farmers can realize.
The end of the growth era for migrant workers: diminishing opportunities in urban migration
Optimists may believe that the issues described will gradually resolve as the economy develops. However, the opportunities missed by rural populations during periods of economic boom are challenging to recover. Coupled with the effects of the urban-rural dual structure, they have become the most vulnerable group to economic risks.
In the past few decades, Chinese farmers have had four main opportunities:
Higher education: The chance to change their fate through expanded university admissions.
Manufacturing sector: The opportunity to provide labor for the growing manufacturing industry.
Construction industry: Jobs created by infrastructure and real estate development.
Urban economic growth: Opportunities arising from the expansion of commercial, retail, and service sectors in cities.
However, all four of these areas now face the challenge of diminishing returns.
The gaokao's intense competition and educational inequality are exacerbated, with elite schools dominating university admissions. In 2022, top schools had hundreds of Tsinghua and Peking University admits, surpassing some provinces' totals. Additionally, "Strong Foundation Programs" now account for a large share of admissions, with Tsinghua admitting 898 and Peking University 890 students through these programs in 2023, representing 26% and nearly 30% of their intakes, respectively.
A 2023 study shows 93% of Strong Foundation students are urban, with over 80% from key high schools, compared to 72% from regular admissions. "Super high schools" are predominantly urban, with only 2.1% of Peking University's students from these schools being rural, versus 17.6% from general high schools. This concentration of resources in urban "super high schools" limits rural students' opportunities in the gaokao, a critical path for social advancement.
Turning to the manufacturing sector, where workers with agricultural household registration make up 52% of the workforce. As of 2024, with the domestic economy cooling and major economies pursuing de-risking policies, a significant amount of production capacity has shifted to Southeast Asia, India, and Mexico. Companies such as Honda, Nissan, SAIC Volkswagen, Bridgestone, Foxconn, and toy giant Mattel have substantially reduced their production capacities in China in 2024. These are just a few examples of the broader cooling in the manufacturing sector. For the entirety of 2024, the manufacturing employment index has remained below 50, indicating contraction. China has clearly passed the peak of its manufacturing development, and the number of available jobs in this sector is on a downward trajectory.
Regarding infrastructure and real estate, the peak periods of these industries employed close to 100 million people — a scenario that is unlikely to be replicated.
As shrinking sectors release a wave of rural labor, urban service industries like delivery and courier are the new employment hubs, now staffed predominantly by rural workers. However, this influx has saturated the market, cutting delivery incomes by half as the number of delivery workers exceeding 11 million by 2024, according to China Logistics and Purchasing.
Moreover, the service sector's capacity to absorb rural labor is waning. As of June this year, the year-on-year growth rate of total retail sales of consumer goods has dropped to 2%, down from 3.1% in June 2022. This raises critical questions: How many more rural workers can be absorbed by the consumer and service sectors, and what level of income can be provided to current agricultural workers?
The challenge of securing a safety net for rural populations has become a critical issue. A 2020 survey on the urban settlement of migrants in large and medium-sized cities in eastern China, such as Jinan, Yantai, and Taizhou, revealed that integrating one new urban resident costs the government approximately RMB 110,000, with a significant portion allocated to pension insurance. With 260 million rural migrant workers living in cities, improving the livelihoods of just this group alone would require RMB 28.6 trillion. Given that the national fiscal expenditure in 2023 was RMB 27 trillion, this represents an untenable financial burden. Covering all rural residents would require a staggering RMB 83.6 trillion.
Government policies promoting home purchases and urban settlement for rural residents, along with reforms in rural land management, are steps towards addressing this issue. Yet, under the current system, a more radical approach is needed to genuinely improve the livelihood of rural populations.
My take
Reform for social equity: a personal and familial perspective
My family’s journey is a classic example of rural-to-urban migration in China. My father, born and raised in the countryside, managed to enter a military academy in his youth, which allowed our family to move to Shanghai. While I grew up in the city, I spent every Chinese New Year back in the countryside, making me an "in-betweener" between urban and rural life.
Reading this article brought back personal stories that echo broader social issues. In the 1990s, one of my uncles in his twenties was detained in Guangzhou for lacking a residence permit, and his older brother had to bail him out. The Sun Zhigang incident in 2003 shocked the nation and led to the abolition of the detention and repatriation system. I also recall a classmate from elementary school who, despite being an excellent student, had to return to her hometown for middle school due to not having a Shanghai residence permit. Around 15 years later, she returned to Shanghai for graduate school and eventually secured residency—a right she had to fight for, unlike those born with it. One of my distant grandfathers, who never married and lives in rural China, still works in a factory at over 70 due to inadequate social security.
These stories highlight the stark inequalities that rural populations face, despite their crucial role in China’s economic development. Rural areas have supported China’s growth through labor in manufacturing, construction and agricultural production, but they have not received proportionate benefits. Migrant workers who built urban properties have seen none of the wealth generated by rising property values. Many spend their lives in cities without access to public resources. This inequality underscores the urgent need for reform.
The economic urgency of reform
As cities now face economic challenges and weak domestic demand, revitalizing rural areas is essential. The recently released Five-Year Action Plan for New Urbanization is significant because it addresses the vast population affected by the nearly 20% gap between the urbanization rates of resident and registered populations in China. This plan taps into the immense economic potential of rural populations.
According to a report by CICC, the average monthly income of migrant workers in 2023 was 5,441 yuan, with an annual income of 65,000 yuan. For a typical three-person household, this amounts to nearly 130,000 yuan annually, with a per capita income close to the median disposable income of urban residents. However, the lack of urban household registration limits their access to public services, likely suppressing their consumption. Studies estimate that not having urban household status reduces migrant families' consumption by around 20%. In 2023, the total number of migrant workers was 176 million. If household registration reforms allowed all of them to gain urban status, it could boost consumption by 1.2 trillion yuan, equivalent to 2.4% of China's total consumer spending in 2023. Moreover, integrating rural populations into cities would drive demand for housing, infrastructure, education, and healthcare, significantly boosting investment.
However, accommodating such a large influx of people poses significant challenges for local governments in terms of finance and governance. According to CICC, the challenge first lies in aligning cost-sharing and incentive mechanisms, as the benefits of urbanization are long-term and national, but the costs are immediate and local. The central government has initiated incentive funds and mechanisms to link fiscal support with the absorption of the agricultural transfer population, with a total allocation of 280 billion yuan to date. Also, future fiscal policies need to shift from "subsidizing infrastructure" to "subsidizing people," ensuring that areas with higher population inflows, not those with greater infrastructure scale, receive proportionately more resources.
Additionally, urbanization strategies must be tailored to regional differences. The Action Plan focuses on two key areas: large cities, where it promotes the development of modern metropolitan areas, and regions with low urbanization rates, where it encourages coordinated industrial and urban development.
