Beijing’s welfare bill that no one wants to pay

In late May, China’s State Council issued guidelines to expand access to basic public services based on a person's place of residence rather than their registered household. The intention is to ease long-standing constraints imposed by the country’s hukou or household registration system, which controls rural to urban population movements by restricting the rights and benefits of those who leave the countryside.

The measures require local governments (Opens in new window) to provide eligible residents with education, health care, employment and social security services where they live rather than where they were born. They expand public school access for children of internal migrants and improve access to public housing.

The guidelines also remove hukou-related barriers to participation in employee social insurance, improve access to basic medical insurance and public employment services based on residence, and seek to progressively extend child welfare, elderly care, social assistance and disability support to eligible residents regardless of local household registration.

These reforms are part of the Communist Party of China’s (CPC’s) broader push to structurally reorient the economy as it grapples with weak household consumption, a declining labour force and a flagging property sector, by redistributing national income towards households through the widening of the social welfare system.

However, similar reforms have been announced over the past decade without them translating into lasting structural change, and even the latest iteration of reforms appears to fall short of addressing long-standing challenges in China’s social welfare system.

One such challenge relates to which level of government bears the burden of increased spending that comes with these reforms.

Caixin Global reported (Opens in new window) in December 2025 that China scrapped hukou barriers to non-local medical insurance enrolment in ten provinces and major cities. Even this limited reform – applying only to medical insurance in certain provinces and cities, not full urban services nationwide – was resisted. Richer cities discouraged migrant participation by limiting public promotion of the new initiatives and through complex payment procedures.

This reflects fiscal constraints stemming from China’s 1994 tax reform, under which local governments receive about 50% of tax revenue but shoulder over 90% of public spending (Opens in new window), fuelling debt pressures Rhodium Group estimates (Opens in new window) that over half of Chinese cities now struggle to service debt or meet interest payments, further constraining fiscal capacity and reinforcing local resistance to expanding costly migrant access to urban welfare schemes.

China’s migrant population is estimated at about 300 million as of 2024, with nearly half concentrated in economically developed eastern provinces. Chinese economists cited by Rhodium Group (Opens in new window) estimate that extending full urban welfare access to this group could cost roughly RMB15–46 trillion (~US$2–6 trillion), equivalent to about 11–34% of GDP and 38–120% of 2024 fiscal spending.

Financing such integration cannot rely solely on higher taxes or mandatory social contributions, which would further burden the financially strained urban middle class, central to the Communist Party's political legitimacy because it is China’s most articulate and politically influential social segment.

Another potential funding source is higher central government borrowing, which accounts for only about 21% of China’s public debt (Opens in new window) as of 2023. However, this low leverage is due to earlier reforms that shifted borrowing to local financing vehicles to contain sovereign risk, which increased local debt.

The annual Central Economic Work Conference (CEWC) (Opens in new window) convened by the CPC in December 2025 did signal looser fiscal policy, and accordingly, the 2026 budget deficit is projected to reach a record RMB5.89 trillion (~US$854 billion) (Opens in new window), up 6% from last year. But only a modest share of this increased borrowing supports public welfare spending, and a 6% deficit increase appears too small to meaningfully boost domestic demand through the social safety net.

Social security and employment form one of the largest shares of China's budget, constituting roughly 15% in recent years and outpacing average growth of ~4% in many areas. However, they mainly fund pensions, including for government officials, insurance subsidies and existing commitments, not wider public welfare.

Central transfers to local governments are set to reach RMB10.415 trillion (Opens in new window)(~US$1.53 trillion), up 2.2%, including a 3.7% rise in basic public service funding, but they are likely to mainly support existing education, health and social aid without significantly expanding the safety net.

Another option is monetisation of state-owned assets, estimated at about RMB131 trillion (~US$18.5 trillion) in 2023, roughly 101% of GDP. However, such large-scale divestment would reduce state control over strategic sectors and face resistance from vested bureaucratic and state-linked interests that benefit from administrative monopolies in sectors like energy, telecoms, finance and utilities.

The CPC could also reallocate capital from infrastructure investment to social welfare, but that would result in sharp contraction in industries like steel, cement and construction equipment, causing significant job losses.

So, while the guidelines by the State Council say that fiscal transfers for social welfare schemes should better reflect resident rather than registered hukou populations, they stop short of committing to substantially higher central funding, thereby leaving doubts about the prospects of these reforms.