Market-oriented allocation of production factors essential for smooth domestic economic circulation

Excessive population concentration in large cities and the one-way flow of people from rural to urban areas contribute to uneven development, and hinder the high-quality and coordinated development of regions.

China has been revving up its efforts to reform its household registration (or hukou) system with a view to lowering the threshold for urban residency. As a result, rural populations are moving to cities, especially to core cities, in a faster manner.

According to data of the seventh national consensus, China had a migrant population of 376 million in 2020, accounting for nearly 26 percent of the total. Since 2010, major cities such as Chengdu, Xi'an, Guangzhou and Shenzhen have seen remarkable increases in their permanent residents, partly as a result of the influx of migrant populations. In 2020, for instance, Beijing had a migrant population of 8.4 million, Shanghai 10.48 million, Guangzhou 9.38 million and Chengdu 8.46 million respectively.

The massive population flow poses a pressing challenge for the country in its attempts to build a unified system for public services provision. Higher pay is a major factor driving the flow of workers. With narrowing salary gaps among regions and changing demographic structure in the country, China is witnessing an increasingly aging population with a low birthrate, which makes it a more urgent task for cities to ensure equal access to basic public services, such as healthcare, pensions and education. Take healthcare insurance as an example. Urban residents with permanent residency enjoy better public medical services compared with their counterparts without a local urban hukou.

On the one hand, the persistent population outflows lead to unbalanced development. In Northeast China and some of the provincial-level regions, such as Hubei, Sichuan, Anhui, Shaanxi and the Inner Mongolia autonomous region, a depopulation trend is emerging. Compared with 2010, the permanent residents of the three northeastern provinces of Liaoning, Jilin and Heilongjiang have dropped by 2.64 percent, 12.31 percent and 16.87 percent respectively. The shrinking populations have resulted in labor shortages, missed opportunities to restructure local economies, public facilities left idle, and the amplifying of the debt burden of infrastructure building.

On the other hand, as more regions and cities are shifting to a service-oriented economy, and the producer service sector requires higher investment in skilled laborers and innovation, the outflow of labor will lead to a low efficiency of industrial development and a failure in transforming traditional industries to modern service industries.

Smooth domestic circulation necessitates the tearing down of institutional barriers hindering the market-oriented allocation of production factors.

First, it is necessary to break down the rural-urban barriers and promote equal exchange and flow of production factors between cities and the countryside. Now there is still a large gap between the country's urbanization rate of permanent residence and that of the registered population, or residents without hukou. This indicates that a large number of rural migrants have not really made their homes in cities. As rural migrants make up the majority of the country's internal migrants, and they are less willing to stay in cities compared with their counterparts migrating between cities, how to ensure rural migrants take roots in cities will be crucial for smoothing the urban-rural circulation of production factors. To this end, it is essential to speed up building channels for equal urban-rural exchange of factors, and improve the mechanism that assimilates agricultural laborers into cities.

Second, the public service system of cities should be improved. As China is at the Lewis turning point and experiencing a historical demographic shift, the accessibility of public services will become a policy priority in guiding the population flow. At the same time, since there is a disparity in the need for social security between the rural migrants and their urban counterparts, it is imperative to unify the public service system so as to help migrants settle down in urban areas, and thus facilitate domestic circulation and build a unified domestic market.

It is also significant to ameliorate the fiscal sharing mechanism that covers basic public services in recipient cities of migrants. Currently, the public spending on education and healthcare and other public services are mainly funded by local governments. In 2020, the share of spending on basic public services by the central and local governments was 14.29 percent and 85.71 percent respectively. In some cases, it is important for the central authorities to increase the fiscal transfer, and fill the gaps in expenditure of the underdeveloped regions.

Third, given the uneven spatial distribution of migrants, some suitable development patterns should be explored to cater to different demographic structures. Based on the comparative advantages in terms of agricultural production and ecological function in different localities, it is practical to coordinate the development between places where people flow out and those receiving migrants, achieve the integrated development of city clusters and prevent regions where labor force flows out massively from suffering a recession.

For depopulating regions, efforts should be made to identify the factors behind the outflow, and improve full life-cycle public services, develop labor-saving industries, such as clean energy, modern agriculture, animal husbandry, tourism, etc, and increase the added value of products by extending the length of industry chains. It is also imperative to increase the use of automation equipment, and promote the smart transformation of agriculture and manufacturing. For areas with ecological functions, it is quite wise to make good use of the fiscal transfer from ecological compensation to boost local development.

The author is an associate researcher of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences and an associate professor of the Faculty of Applied Economics at the University of the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views don't necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn