China Economy

Concrete steps needed on income reform in China, say analysts

The nation's long-awaited income reorganisation scheme falls short of specific wealth-gap target

PUBLISHED : Thursday, 07 February, 2013, 12:00am
UPDATED : Thursday, 07 February, 2013, 5:50am


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The long-awaited plan to ease the widening income gap has been cheered by the public, with its ambitions to raise wages and cut taxes for the poor, and allow them to share more of the state's growth. But experts are waiting to see more concrete steps.

The State Council has approved guidelines submitted jointly by the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Human Resources and Social Security, after earlier proposals were repeatedly amended in the past eight years.

The cabinet urged relevant departments and local governments to come up with more detailed action plans, in a statement issued just a few days before the weeklong Lunar New Year holidays, and about four weeks before Premier Wen Jiabao steps down from his 10-year tenure in March.

"It's good timing to roll out the guidelines," said Su Hainan, a vice-chairman of the China Association for Labour Studies. "They will lay a foundation for the new administration to deepen the reforms. The good news will allow us to celebrate the Spring Festival holidays in a cheerful mood."

The more than 8,000-word-long document set goals which include increasing wages and reducing taxes for the poor, liberalising interest rates, and deepening capital markets.

"The plan covers all the bases. Any policy that is generally accepted as being useful in improving income distribution is included in the proposal," said Societe Generale China economist Yao Wei.

The plan covers all the bases. Any policy that is generally accepted as being useful in improving income distribution is included in the proposal

But she cautioned that the strategy may not be easy to implement, probably because it is "too comprehensive".

Shen Jianguang, Mizuho Securities chief economist for Greater China, said reducing tax burdens for households, raising dividend payments by state-owned enterprises, and boosting deposit interest rate were good ideas included in the guidelines.

He estimated in 2010 that these steps could contribute to household income by at least 4 trillion yuan (HK$5 trillion) over the years to 2015.

Still, Shen and Yao, along with other researchers, believed the guidelines were too general and lacked concrete measures or measurable targets.

For example, the guidelines pledged to cap SOE managers' salaries, but failed to offer any quantifiable guidance.

Shen also said a plan to ask state-owned enterprises to submit 5 percentage points more of their profits to the government was "a bit too modest", given that the state sector generates more than 2 trillion yuan worth of profits every year.

At present, SOEs submit 5 per cent to 10 per cent of dividends to the state-assets regulator annually.

Probably more importantly, the plan fell short of a specific target about wealth gap, something that such a reform should not have omitted.

Instead, it repeated a goal set by the Communist Party in November to double per capita income for urban and rural people by 2020 from 2010.

"This probably reflects the difficulty the government expects to have in reducing income inequality and the strong resistance from vested interest groups," said Nomura International's chief China economist Zhang Zhiwei.

The Gini Coefficient - a wealth gap measure - stood at 0.474 last year, above the international danger line of 0.4 and a big jump from 0.3 about 25 years ago. The closer the coefficient is to one, the more serious the wealth gap and greater the tendency for a rise in social unrest.