Some social reform champions are calling for the immediate abolition of the hukou system, or the notorious household registration system that was designed to block rural-urban migration half a century ago.

Abolishing, or to a large extent relaxing the system, would open the floodgates for up to 300 million rural people to enter cities.

However, a rather cruel reality is that most cities, large and small, are only poorly prepared for accommodating those people. A rush job in social reform could turn into an economic and ultimately political disaster.

The nation's leaders must take the initiative to reform city-level public financial systems before local governments can work in a responsible way.

Citizens deserve the equal Constitutional right of freedom of migration. And all the discriminatory rules against the migrant workers and their children are morally unacceptable. But the practical problem is that few city governments are equipped with the adequate financial capabilities to provide a decent life for their would-be new residents.

Some people say the abolition of the hukou system can start in small cities, so as to avoid having all the large cities, already under heavy population pressures, to further stretch their capabilities. Such a proposal would be almost nonsense if the small cities continue to have limited financial autonomy and expertise.

Arranging new urban lives for migrant workers requires a nationwide program ultimately coordinated by the central government and with some city-level financial reform as a necessary component.

Now, there is little doubt that China's forthcoming annual parliamentary session will talk about how to change the hukou system, but the debate must remain sober enough as to avoid letting empty moral arguments hijack it. There is also a moral duty to lay good groundwork for the inevitable change.

If some 70 percent of its population are living in the cities, as economists predict will be the case once the hukou barrier is removed, China is qualified to be an urban society.

But that would be something that China has never experienced before. In financial management, it means that it is no longer a country of a distant sovereignty, run by a learned political and economic elite, shielding thousands of small villages dispersed across a vast territory as it basically has been for almost two millenniums.

It will become a country of a central government, which plays a guiding and regulatory role rather than controlling all resources, dealing with a limited number (say several hundred) of larger and certainly more active communities each striving to flourish based on their distinctive economic and cultural potentials.

Moreover, cities tend to form clusters. In such a cluster, one major city tends to form its business "biosphere" including many small nearby towns supporting a common network.

How the Chinese system can facilitate such a change will be a very tough challenge. Many cities do not have independent financial resources other than the revenue from the sale of land-use rights and are in no way near any dependable self-government.

In Beijing, the capital city, it is said more than half of its GDP in 2009 was contributed by land rights auctions. The same is more or less true for other rich cities along the coast. As a result, local revenues grow only where the property industry is bubbling.

This is a highly risky economic model that cannot last long. Cities will fall hostage to one industry's ups and downs if they don't learn other ways to finance local public projects and feed their employees.

And if that happens, what services would they provide to their residents, old and new?

That is the lesson that they will have to learn in the next phase of the nation's development.

Apart from having an overall national plan, the central government should make the cities learn this lesson quickly.

That would include, economically, being more active in raising development funds from capital markets, setting up local banks, issuing municipal bonds, working with national and international companies, and, politically, building up a stronger people's congress to supervise the plan and the use of local public funds.

These are the institutional guarantee of a harmonious urban society, including decent homes for millions of new city dwellers. But China is still far from having this ready yet.

The author is business editor of China Daily.

(China Daily 03/04/2010 page14)