This item has been corrected.

The Chinese government is finally taking steps to dismantle the household residential system, one of its most oppressive laws and a major source of China’s growing income inequality. That’s the good news. The less sunny news is that the first stab at reform is a timid one.

The measure, announced on Dec. 30, involves allowing the children of migrant workers to sit for the college entrance exams or gaokao in the city they live in, instead of having to go back to their parents’ home town. That should in theory help level the playing field for some 20 million migrant children, because colleges in big cities accept lower test scores for local residents.

It marks the first actionable loosening of the household registry system, known more commonly as the hukou (loosely translated as “registered permanent resident”) system, which limits the access of China’s 200-300 million migrant workers to things like education, health care, social services, and pensions.

However, Reuters reports some serious foot-dragging among the cities with big migrant populations: namely, Guangzhou, Beijing and Shanghai. Of these, only Guangzhou, which has the most migrant workers, is planning to count migrant student applications as local. A slew of smaller provinces, however, have already rolled out plans (Chinese), most of which count migrant students as local applicants.

This is not, in short, a bold first move in hukou reform. True, little that we have seen so far from China’s new administration, unveiled at the 18th Communist Party congress in November, would qualify as bold. However, incoming premier Li Keqiang has aggressively championed the rights of migrant workers, making it something of a mystery as to why the new administration allowed the less-than-impressive policy changes to be publicized.

Of course, the sheer scale of hukou reform makes caution prudent. Official estimates put the cost at $786 billion over ten years. But reform of gaokao is almost certainly the lowest-hanging fruit. That it should have been an easy political win for the new leadership makes the disappointing debut all the more baffling.

One possible explanation is political expedience. The new policy was announced after a daughter of migrant workers became a media sensation by micro-blogging her struggle against the Shanghai education commission, setting off protests in Beijing and Shanghai. The government’s response may be a sign of its increasing sensitivity to popular outrage about China’s worsening wealth gap. However, by revealing two of the three biggest cities’ resistance to reform, it risks whipping up still more popular backlash.

Perhaps a more likely reason for the weak gaokao reform is the new administration’s flimsy control over strong municipal governments. Mega-cities like Beijing and Shanghai worry, and with reason, that loosened hukou policies will attract a flood of migrants. Then there’s the price tag on reform. To cash-conscious local leaders, expanding the availability of services like public education and medical care to millions of migrants sounds like an expensive proposition, as a recent survey of mayors in eight provinces showed.

Still, smaller provinces fell in line with issuing gaokao reform—why couldn’t the big cities, as well? That the central government didn’t force their hand on something so low-risk does not bode well for its ability to do so when it pushes for the much broader-based  reform that China’s migrants—and its economy—so desperately need.

Correction: An earlier version of this story said that the Communist Party congress was in October; this was changed to November.

This item has been corrected.

The last-minute deal to postpone America’s fiscal cliff has markets rejoicing: March futures for the Dow Jones Industrial Average bounced 1.9%, by last count, while the Euro Stoxx Index soared 2.4%. But that joy is short-termist. Though it warded off the worst, the deal institutes levels of austerity that, unlike economies across the Atlantic, the US has so far avoided.

In total, the crimped consumption power resulting from Congress’ new plan will cost the US economy somewhere in the range of 1.30%-1.75% GDP growth this year, according to estimates by Cullen Roche and Brad DeLong. Of course, that’s vastly preferable to the 4%-5% hit that the full impact of the fiscal cliff would have entailed. But for a country clawing its way back from a recession, it’s grim news.

Most immediately worrisome is that, while lawmakers agreed to prolong Bush-era income-tax cuts for households earning less than $450,000 a year—all but the highest-paid 0.7% of the population—they let a cut in the payroll tax (which pays for social security) expire. Though doing so will close the 2013 budget deficit by some $126 billion, it means that 160 million Americans—including two-thirds of the lowest quintile of earners—will see around $600-$2,000 skimmed off their paychecks this year.

That exacerbates a trend of falling wages in the past few years, and is particularly worrying given that consumer spending is a critical engine of the US economic recovery. In fact, Goldman Sachs’ Jan Hatzius expects that the expired payroll tax cut alone will drain 0.6% off 2013 GDP growth, in the form of reduced consumption.

And while this does help cut the deficit, it’s not by that much. Extending the Bush tax cuts for all but 0.7% of households will rustle up a measly $600 billion over a decade. The president’s original plan, in which the threshold for raising income tax was $250,000, or around 3% of households, would have raised $950 billion. (Letting the tax cuts return to their pre-Bush levels across the board would have saved $1.9 trillion, but of course at the cost of hurting consumers in the pocket.)

In agreeing to these terms, the Democrats seem to have taken further tax hikes on the wealthy off the table, at least for a while, even though these are politically popular. The implications of this are twofold.

First, a larger share of reductions in the budget deficit will have to come from spending cuts—by far the more contentious side of the negotiations. The current deal postponed the spending cut showdown for two months, which is also roughly when the US government will have exhausted its “extraordinary measures” to avoid exceeding the debt ceiling (which it formally hit on Dec. 31). That makes yet another vicious partisan fight almost inevitable. The president has a trump card here: the automatic spending cuts or “sequester” that will take effect if no deal is reached include a deep cut to defense spending, which the Republicans would hate to see happen. But given how hard it was to reach an alternative deal on Dec. 31, it’s not clear why it should be any easier on Feb. 28.

Second, it means that any extra revenues have to come not from higher income-tax rates but from long-overdue tax reform. This means simplifying the tax code and eliminating nonsensical loopholes like the tax break on mortgage interest. Such loopholes generally benefit those who can afford to navigate them, so getting rid of them is another way to address the yawning income-inequality gap. Obama said in a speech on Dec. 31, as the final details of the fiscal-cliff deal were being hammered out, that tax reforms to increase revenue would have to be part of any future fiscal deals, and he may use the threat of the sequester to force Republicans to agree to some. But once again, it’s hard to imagine the two sides agreeing something in the next two months that looks anything like the thoughtful, comprehensive reform the country needs.

Correction: An earlier version of this item said that Dow futures were up 248%; it should have read 248 points. This was corrected to 1.9%.

Is capital leaving China? Not if you believe the State Administration of Foreign Exchange (SAFE). Although the authority has just issued data (in Chinese) showing a growing balance-of-payments gap—from $12.5 billion in the second quarter of this year to $19.1 billion in the third—it says that the shortfall is nothing to do with money leaving the country, but merely the result of Chinese companies holding dollars to brace for the yuan’s depreciation, thus making the capital-account deficit increase. (The balance of payments is the difference between the capital and current accounts.)

However, after weakening earlier this year the yuan has recovered, notes Reuters, so there ought to be less need for companies to hold on to dollars. What is more, SAFE cited the same explanation last quarter, when the capital account first swung into deficit, emphasizing that “there is no sign yet of capital flight.”

So, doth SAFE protest too much? It’s hard to say. Tracking China’s capital outflow is notoriously tricky. The Wall Street Journal’s try at tallying it relies on relative foreign exchange reserve levels to reflect the capital in- and outflows. The People’s Bank of China, the country’s central bank, has yet to publish data past September (in Chinese). But given that the bank added just $3 billion to its foreign reserves in Q3, according to today’s SAFE release, the Journal’s method would suggest capital is indeed fleeing.

China finance expert Michael Pettis, meanwhile, sees signs within the banking sector that companies are strapped for liquidity, implying that “flight capital is more than enough to offset China’s very high trade surplus”:

Remember that thanks to disguised flight capital and commodity stockpiling the surplus is almost certainly a lot larger than reported, and yet banks are still feeling the liquidity squeeze. And for all their happy noises, the authorities nonetheless are worried, at least about certain parts of the banking system.

But there are other factors behind muddy account balances, explained Société Générale’s Wei Yao last September. At least some of the capital that appears to have fled China, said Yao, is actually being held in a variety of unaccounted-for ways, as China dabbles with renminbi internationalization. ”[A] Chinese exporter earns some US dollars by selling goods to foreigners and then deposits the proceeds with a Chinese bank, instead of converting to yuan as before,” she wrote. “The bank either lends the money overseas or utilised it in some other ways, and so it becomes FA [financial account] outflows in the form of an increase in other investment assets.”

Yao did, however, find at least one spot on SAFE’s ledgers that invites skepticism: the “net errors and omissions” section. “[It is] a most opaque account under which skillful hot money sneaks in and out of China,” she noted. Looking back to 2011′s balance of payments, the “net errors and omissions” amounted to a cool $35-billion deficit. That seems pretty large, considering that it essentially means “mystery money.” But not so large, perhaps, when compared with today’s data. SAFE’s third-quarter report reflected a “net errors and omissions” deficit of $19.5 billion—and the figure for the first three quarters of the year came in at $48.7 billion. Skillfully sneaking out, it seems.