China's fertility rate is below replacement level. The government is attempting to increase this rate by relaxing the one‐child policy. China faces a possible tradeoff because further urbanization is needed to raise incomes but may reduce future fertility. We decompose China's rural–urban fertility gaps using both de facto and de jure criteria for defining the urban population. The fertility‐depressing effects of holding urban hukou are more than three times larger than effects of urban residence. Less of the rural–urban fertility gap by hukou status is due to differences in characteristics than is the case for the fertility gap by place of residence.