May 28th 2026|5 min read
Listen to this story
AN IMPERTINENT SOUL once asked Paul Samuelson to name a social-scientific principle that was true but not trivial. The Nobel laureate’s answer was comparative advantage, which explains why two countries can both benefit from trade even if one is better than the other at everything. That principle has sadly fallen out of fashion. So here is another one that is true, non-trivial and more germane to this age: China would face fewer trade wars with the rest of the world if its people were less thrifty.
China angers its trading partners because it sells more goods than it buys, earning more than it spends. The underspenders include its households, which save at an unusually high rate. China’s migrants are among the thriftiest. And there are a lot of them. The number of people who have left the countryside to work in cities was 131m at the end of 2025. (The broader “floating population”, which includes non-workers and urbanites living outside their home city, exceeds 357m.)
The migrants’ thrift reflects insecurity. Though they live and work in bustling cities, many remain registered in their villages of birth under the hukou system of internal passports. This creates what one author calls “invisible walls” within cities. It makes it harder for new residents to gain full access to social insurance and public services where they live. Instead they save strenuously for a rainy day. In 2012-22 the saving rate of migrant households, living in cities with rural hukou, was 6.8 percentage points higher on average than similar households with urban hukou, according to a paper published last year by Yizhi Xu and colleagues at the IMF.
Hukou reform could reduce some of this precautionary saving. Migrants’ extra spending would leave Chinese firms with fewer excess goods to dump on global markets. That would cut China’s export surplus and ease trade tensions with the rest of the world. The non-trivial implication is that hukou reform, not tariffs, might be the answer to trade wars.
China has clung to its internal passports for various reasons. In 1956 the government was spooked by what it called the “blind outflow” of farmers, demobilised soldiers and other rural folk to industrial centres. It has relied on hukou to prevent slums and maintain people’s ties to the land, which provides a refuge in hard times. When jobs dry up, China’s migrant workers have dispersed to their village plots rather than uniting fearsomely in cities. Without hukou China would also need some other way to decide who may farm and build on rural land, which is owned communally.
So China’s reform of this system has been incremental and uneven. That has made it difficult to summarise, let alone quantify, progress. Some scholars have tried to “score” hukou requirements in different locations. But these numbers are somewhat subjective. Others have looked not at policies but at outcomes: how has the registered population grown? But these more objective indicators can also mislead. An attractive city might hand out more hukou registrations not because its eligibility requirements are lax but because people try harder to fulfil them.
A valiant attempt to sidestep these problems was published in 2024 by Zhu Chen of Southwestern University of Finance and Economics in Chengdu, and Qianqian Shang and Jipeng Zhang of Shandong University. They first consulted a city’s official documents to identify the hurdles a migrant must clear to obtain hukou. They then estimated what share of the floating population in the city would clear these. The result is what they call the “settlement probability”. (Since a reform could attract migrants who benefit from it, they base these calculations on the population present in a city a few years before it was enacted.)
Chart: The Economist
On the face of it, their index shows a dramatic easing of hukou requirements over the past 15 years. In 2011, 46.9% of the floating population in the average city would qualify for its hukou if they tried. By 2024 that average was 94.6% (see chart). The index may miss some practical impediments that do not appear in official documents, the authors point out. Dongguan, a southern city, said in 2018 that settlement restrictions for college graduates would be “resolutely eliminated”. But in practice, many applicants still had to show they had paid several years of social insurance.
Hurdles also remain high in China’s biggest and richest cities. The settlement probability is 0.19% in Beijing and 1.44% in Shanghai. If you weight cities by GDP, the average settlement probability falls from 94.6% to less than 80%, The Economist calculates.
Probabilities are also not actualities. Not everyone who could obtain urban hukou will apply for it. Many rural migrants are reluctant to forfeit land rights in their home villages. In the easier cities (with settlement probabilities above 50%) migrants who want to settle down are outnumbered by those who don’t, a survey found in 2017. The pattern would be instantly recognisable to Marx (Groucho, not Karl): a go-getting migrant wouldn’t want hukou from any city that would admit them too readily.
Fortunately, reforms making hukou more available have been accompanied by reforms making hukou less necessary. In many cities, a local hukou is no longer strictly required to enroll in social insurance, buy a house or put children in a state school, although other barriers remain. On May 22nd the State Council, China’s cabinet, urged cities to continue these efforts to extend public services to unregistered residents.
The reforms also seem to be having an effect on China’s thrift. The IMF economists found that the gap in saving rates between city-dwellers with and without urban hukou has narrowed from 11.8 percentage points in 2014 to just 3.2 points in 2022. To stop its trading partners building tariff walls against its goods, China must continue tearing down the invisible walls in its cities. ■
Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.
This article appeared in the Finance & economics section of the print edition under the headline “A passport to prosperity”
Discover stories from this section and more in the list of contents