China unleashes hukou reform

From Citi today:

Hukou reform details reaffirm positive reform momentum — China’s State Council released a three-page document regarding China’s hukou reforms, targeting a uniform hukou registration system and the gradual provision of an equitable public service system. This follow-up to the 30 June Political Bureau meeting was delivered slightly earlier than our expectation (approx. Sept.), demonstrating the government’s proactive reforming stance.

The gov’t targets to settle a 100m population (mainly migrant workers’ households), moving from rural areas into cities/towns with hukou provided by 2020, and to guide orderly urbanization (ranging from full release to conditional release) for different cities (small ones below 0.5m, medium ones with 0.5-1m, large ones with 1-5m, super large ones over 5m population), and to provide a matching public services system including education, health care, employment, social insurance, social housing based on the residency period, etc.

We believe the hukou reform could help stimulate consumption demand and act as a stabilizer during China’s economic transition period, given the significant consumption gap (approx. 3x) between urban and rural areas, and also provide a buffer against a property-sector slowdown. A rough calculation shows the hukou reform could lift China’s retail sales CAGR by 0.5ppt, factoring in the incremental consumption from the extra population with hukou due to the reform (Figures 2 & 3). Key beneficiaries include: 1) mass-market consumption including clothing, education/recreation, F&B-related (Figure 4); 2) consumer durables: air conditioners, PCs, autos, etc. (Figure 5); 3) insurance and health care (Figure 6), given pension and medical coverage ramp-up; 4) social housing or mass developers (Figure 7), given strong housing needs from migrant workers; 5) banks with high rural exposure given potential rural-land related transactions; and 6) urban infrastructure and utilities (Figure 8), given intensified needs.