China's Underclass Problem

Added: 2026-06-01

[00:00:00]This is a part of China that outsiders rarely get to see. Everyone's heard China's incredible growth story, but millions of people are being left behind. And many are getting pushed into China's underclass. Some of them made mistakes. Others were in the wrong place at the wrong time. I'm going to reveal four of the major causes. China doesn't let people move as easily as other countries. China has a system that restricts people's level of access to housing, education, and public services.

[00:00:29]based on where they were born. It's called the hookow system. People with urban hookow can make ends meet much easier. Those with rural hookah, on the other hand, get rights to some rural land which they can use for farming. As you know, farmers often make very little money and they have very few opportunities. Anyone who wants something more than being a farmer needs to move to a city and has to put up with the hookow system. China has somewhere around 300 million rural migrants working in cities. Without the right hook, they might have to leave their children to be taken care of by someone else, maybe their grandparents. This system lets China control migration by just adjusting the rules. It gives China more control in general by making everyone more dependent on the state. It also creates an underclass unable to settle down, thus keeping the labor they need to build infrastructure cheap. It is possible to switch your hook, but it's often difficult, especially for those who need it the most. The difficulty changes depending on the city. The biggest cities have the strictest requirements. This system has created the base of China's underclass, but there are other factors increasing its size. A lot of countries have crazy housing markets, but not to the extent of China. Chinese people don't invest in the Chinese stock market as much as Americans invest in their market. Most of the largest companies in China are controlled by the state and serve them over their shareholders. This makes investing in them less profitable, so people invest less in the stock market.

[00:01:55]The excess capital floods into the real estate market instead. The insane economic growth led to equally insane growth in housing prices. Some companies bet on this being a trend that would almost certainly continue till the distant future. The massive real estate developer Everrand was depending on it to be able to pay off the colossal amount of debt they took on to fund their expansion. Unsurprisingly, they eventually collapsed. This was so unsurprising that the Chinese government had already stepped in to hopefully mitigate the upcoming disaster with the three red lines policy. This limited the amount of debt they were allowed to take out, but there was still a crash. It's not just Ever Grand. The entire housing market is struggling now. Many people have most of their life savings tied up in their house, which is one factor pushing more people into the underclass.

[00:02:46]Society as a whole may have changed for the worse, or at least people think it did. For a political party that wants to maintain power, these mean basically the same thing. Some researchers ask Chinese people what influence they think different factors have on why some people in China are poor. On average, people used to rank lack of ability as number one, but now it's fallen to sixth. Lack of effort was second, but now it's ranked fifth. The top spots have now mostly switched to more government failures. Unequal opportunity was fifth, but now it's first. The unfair economic system is now tied for third with grew up in an impoverished family. The one individual failure that has risen up the ranks is lack of education. The only one that can also be partly a failure of the government.

[00:03:33]Education was promised to be a ticket out of the underclass. Kids flooded into the education system for years, but now they're starting to graduate, and that promise has been broken. China has a dangerously high youth unemployment rate. There are now millions of young people who are mad at the government and have too much free time. History shows that this usually doesn't end well for people in power. And the underclass problem more broadly needs to be fixed to keep China stable and for the economy to grow to the next level. Stopping the hook systems involvement in creating the underclass is an obvious first step. In recent years, China has been wanting to reform the hook system, although not for any silly reasons like justice or equality. At this point, China is dominating the global export market so well that there isn't that much more room to expand. To maintain their beloved high growth rates, China needs to grow the previously neglected parts of the economy. They can do this by increasing domestic consumer spending.

[00:04:34]Accomplishing this requires a larger, stronger middle class. Lifting the artificial burdens on the underclass of rural migrants by giving them the basic government support that everyone else gets would help with this. A reform would also encourage a whole new wave of migrants coming to cities with the hope of joining the middle class too. There are many other accidental benefits that come along with these reforms. All these new people would help the struggling housing market as well. When people move to cities, they generally make more money, which is obviously good for the economy. China's making plenty of minor changes and some major ones. In smaller cities, it'll be possible to at least meet the qualifications for getting local hookah in as little as 6 months.

[00:05:18]Like I said, complete reform hasn't happened yet, and this is for a few reasons. Local governments worry that letting all their residents access all their public services will overcrowd them. A problem made worse by all the new people that will come to cities because of the reforms. Even some rural migrants worry because they would lose the land rights that guarantee at least some level of income. It's not entirely clear how strongly the national government wants to change things. They might decide it's not worth the cost and cancel most of their plans. But if they don't push forward, they're going to land right back where they started. In that case, I guess they'll just wait to have the same argument again 10 years later.