One of the key inequalities in China today is the divide between urban residents with local registration (hukou) and those without. This chapter examines the historical and systemic causes of this divide between the hukou and non-hukou populations, focusing on the provision of basic education. The limited access to urban schooling for the children of rural migrants is a divisive issue in the debate on citizenship and social rights of migrants, and one with adverse implications for labour markets and intergenerational mobility. This chapter uses the provision of basic education to illustrate how fiscal decentralisation in China – under particular historical circumstances, produced a divisive, rather than inclusive growth outcome. Moreover, even though education policies have shifted over the past two decades to calling for inclusiveness, their impact has to date remained limited, leaving the government with an inequality it does not want and finding very difficult to reverse.