Local governments need political incentives and fiscal support if they are to turn the country's 260 million migrants into urban citizens, as China's urbanization pace gathers steam, experts said.

Cities need fiscal support in urbanization drive.[File photo]

"The cost will be a huge burden if recipient cities are asked to pay the bill alone," said Feng Kui, a researcher at the China Center for Urban Development under the National Development and Reform Commission.

"Recipient cities and labor-export regions should share the bill, and the central government should coordinate the process."

Vice-Premier Li Keqiang stressed on several occasions recently that urbanization will create China's biggest domestic demand. He said reform of the hukou (household registration) system and the transition of migrant workers into urban citizens are the top priorities.

His calls have also raised the hope that a detailed reform plan will emerge during and after annual meetings of national legislators and political advisers in March.

Social services given to holders of urban hukou, such as social security, public housing and education, are usually better than those given to non-urban hukou holders.

But even though migrants live and work in cities, they usually have non-urban hukou and thus cannot enjoy the same benefits as urban hukou holders.

However, expanding the current social entitlements that urban residents enjoy to the huge number of migrants raises a critical question: Who is going to pay for it?

China's urbanization rate, calculated by the share of people who work and live in cities compared with the total population, rose to 52.6 percent in 2012, according to the National Bureau of Statistics. But only 35 percent of people have an urban hukou. This means that more than 17 percent of China's population, or 260 million people, are working and living in cities but do not have urban hukou.

The China International Urbanization Development Strategy Research Committee, a think tank under the Ministry of Housing and Urban-Rural Development, estimated that the average cost of turning a migrant worker into an urban resident is 100,000 yuan ($16,000). Given that 1 percent of China's population will become urban residents every year in the coming 10 years, the nation has to spend 1.4 trillion yuan a year to accomplish the task.

"Why is the hukou system so hard to reform? The real reason is the social benefits behind it. You need money to pay for the benefits," said Qiao Runling, deputy director of the China Center for Urban Development under the National Development and Reform Commission.

"The central government should pay, which it is already doing in the healthcare and compulsory-eduction sectors. The recipient cities' governments should pay. Employers and migrants also have to pay some."

Cai Fang, director of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences, said the central government should set a target and timetable for urbanization.

An urbanization rate based on the number of residents with hukou should replace the previous calculation, which is based on the regular residence population. This will create an imperative for local governments to raise the number of urban hukou holders.

Then the central government should set up a clear outline to let migrants know how they can apply for hukou, Cai said.

Though such a roadmap is available in some cities, such as Shanghai, experts said the threshold is too high for ordinary migrants.

"In Suzhou, for example, people who apply for a hukou need to have a proprietary home of no less than 75 square meters, and have a long-term labor contract with an employer. Most migrant workers there could not meet these requirements," said Qiao, the researcher from the National Development and Reform Commission.

In the reform of the hukou system, most experts, however, propose an "incremental" strategy instead of a radical one.

Zeng Kanghua, a public finance professor with the Central University of Finance and Economics, said the reform should start with the smaller cities.

"I've participated in the consultation of the reform of Beijing's kindergartens. The municipality intended to offer free kindergarten education to all Beijing residents regardless of whether they have a Beijing hukou or not. But they worried that if the deregulation is made, people across the country will flock to Beijing," Zeng said.

The outdated system to distribute fiscal resources is another hurdle to promote the reform.

"The current fiscal revenue expenditure system is mainly based on the number of hukou holders, rather than the number of regular residents," Zeng said.

"It would put huge pressure on local governments if the fiscal system does not change."