A hukou is a permit given by the Chinese government which entitles people to live in a certain area and receive government services. It's also one of the most significant social issues in contemporary China, branded by some as a form of apartheid. Under the system, every person is broadly classed as either a rural or an urban resident, and is registered to access government services in the area of their birth and nowhere else. This means that roughly two hundred million of the migrant workers who live in cities and manufacture goods for export to the western world live as second-class citizens, unable to access schools, hospitals or public housing.
China's economy has developed rapidly as it has implemented market reforms, and with this development has come a growing divergence between the standard of living and opportunities available to people in the cities and the countryside. There are many advantages to dwelling in the cities, not the least of which is the opportunity to work in the modern part of the economy. Chinese factory jobs may be low-paid and hard, but clearly they're appealing to rural residents or China wouldn't have urbanized so rapidly in the last decade. On top of access to these jobs and a more modern way of life, government services also tend to be better in the cities. Far fewer rural Chinese attend university than do the children of city-dwellers, for instance.
Factors such as these have underpinned the enormous urbanization that has taken place in China in recent decades. Roughly 50% of the country's population, who themselves make up about one-sixth of humanity, now live in cities. The hukou system is an attempt by the Chinese government to exert some control over the movement of people between the cities and the countryside by obliging rural residents who want to move to the cities to apply for residency permits.
We often think of China as having "gone capitalist", and it has in many ways. But restrictions such as these on the free movement of people within the country, which are unthinkable somewhere like Britain or the United States (but existed in the Soviet Union), highlight the hybrid system that in fact exists. The Chinese government is trying to manage an enormous process of social and economic change while maintaining Communist Party rule, and it still subordinates the free market to the interests of social stability.
The rationale for the hukou system is to discourage too rapid a rate of urbanization and to keep a lid on the cost of government services in the urban areas. China is undergoing one of the largest migrations in the history of humanity, and if the government had to expand its service infrastructure at the same rate then it would quickly collapse. Furthermore, it would be politically difficult to explain to long-term residents of somewhere like Beijing or Shanghai why the quality of their services and the resources available should be rapidly diluted in an attempt to cater to outsiders. Excluding hundreds of millions of new arrivals in the cities from the housing market also keeps a lid on house prices. By making life in the cities harder, it discourages too rapid a rate of migration which might lead to pervasive unemployment and corresponding instability.
In reality, however, the hukou system has started to fray at the edges. Technically, the hukou system mandates that Chinese live in the area for which they have a residency permit, but this system has broken down due to the need for cheap labour in the cities. Cities won't grant hukou, but nor will they enforce the residency critieria. Hundreds of millions of Chinese live on the margins of urban society, powering the factories that are pushing the economy forward but unable to access services and living in a precarious legal status that makes them liable to sanctions should they incur the displeasure of the authorities. As their children cannot attend schools in the urban areas (hukou is hereditary, meaning even if you have a child in a city - and good luck finding a hospital, by the way - they still have a rural hukou), they must either stay with relatives in the village, be home-schooled, or attend an illegal school liable to be shut down by the authorities.
The hukou hence also serves as a means of social control; urban migrants, a major source of potential social unrest in China, are discouraged from strikes or other actions because they can so easily be sent back from where they came. Furthermore, the Chinese authorities have used hukou as a means to blackmail people into "good behaviour" - after riots in the city of Zengcheng earlier this year, the authorities offered hukou to anyone informing on the rioters. The police in Beijing recently temporarily shut down many of the illegal schools used by the children of migrant workers in an apparent attempt to remind them of the precariousness of their existence and encourage them to return to rural areas as the country's economy slows, rather than have them knocking about in the cities where they might be a force for instability.
Reform of hukou has been promised for years, and the need has only grown greater as urbanization continues apace and capitalism continues to generate winners and losers and corresponding inequalities. Nor has it escaped anyone's notice that the class system hukou creates is so at odds with Communist ideology. Some cities are beginning to experiment with reform, offering permits based on a points system. As with so many things in contemporary China, however, the interests weighing against reform - business owners who benefit from cheap labour, residents with urban hukou who don't want to share their services - are formidable. As the system generates an increasing amount of social unrest and ever-more blatant inequalities, eventually something will have to give - the question is what, when, and with what consequences for China's development. Challenges of this magnitude took western economies decades to overcome; don't expect China to be any quicker.