China Economy

State of inequality as China's rich get richer

As the rich get richer against a background of party privilege and corruption, the widening wealth gap brings a real threat of social unrest

PUBLISHED : Wednesday, 07 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm


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In a nation where wealth confers immense power and privilege, it's no wonder policymakers are having such a hard time rewriting the rules to reverse a dangerously widening wealth gap.

To mainlanders without the money, one reason the rich get richer while the poor grow steadily poorer is corruption.

For those with the money and the power, the fear of losing their privileges is slowly being tempered by another fear: that the workers of the People's Republic may not be prepared to put up with serious inequality for much longer.

Research has already shown that the wealth gap has exceeded a level deemed dangerous and likely to stir social unrest

One retired worker, who joined the Communist Party's liberation army more than 60 years ago, criticised how the revolutionaries are rewarded in their old age as he told how he survives on a monthly pension of just 1,200 yuan (HK$1,490).

"We are a minority group of people forgotten and near extinction," he wrote. "Our income can't even afford a tiny grave."

Then there is the public scrutiny and rampant criticism on the internet of the lavish lifestyles of officials. Cai Bin, political commissar of the urban management bureau in Guangzhou's Panyu district, was one of the latest disgraced officials to be placed under party investigation after internet users found that he owned 22 properties valued at more than 35.5 million yuan (HK$43.65 million), according to The Southern Metropolis Daily.

And yet a plan for reform of income distribution has existed for the past eight years - only it has been subject to constant delay which has seen it amended half a dozen times.

Meanwhile, the well-heeled officials of state-owned enterprises maintain a stranglehold on lucrative industries, such as oil and telecommunications. They can raise funds at low costs for their monopolies, while small private businesses are struggling and workers fear for their jobs.

An elite class formed around senior officials continues to set up and expand businesses unhindered, while the cycle of privilege continues into the next generation as the children from wealthy families get admitted to elite schools.

Most analysts believe that an overhaul of income distribution is inevitable, although the process will be a long one and vested interests will remain the biggest hurdle.

Premier Wen Jiabao pledged in March that a final income redistribution plan would be drawn up by the end of this year. Observers believe Li Keqiang , who is widely expected to succeed Wen in March, should launch the long-delayed reform now - to demonstrate how the less privileged and the poverty-stricken will be at the heart of his policies. He is currently the man overseeing the National Development and Reform Commission, the agency in charge of the reform plan.

Su Hainan, a researcher at the Labour and Wage Institute of the Ministry of Human Resources and Social Security, who has participated in policy discussions, said many state-owned enterprises have resisted paying the required dividends.

He was confident a reform plan would be ready by the end of this year and would be launched by March at the latest, when the new generation of government leaders take their posts.

But don't expect the plan to go into detail, Su added - it will "look more like a principle, a framework, and a direction", with more detailed measures rolled out later by various ministries and local governments. The labour ministry, for example, is looking at building up a wage system that would "more reasonably" reflect the regional differences in inflation and economic growth, Su said. It may cut the unfairly large subsidies granted to state-sector employees and set up a mechanism to adjust the minimum-wage levels in a "timely and reasonable" manner.

According to Asian Development Bank economist Zhuang Jian, reforms are likely to include higher dividends payable by state-owned enterprises to the government to fund low-income earners; wage ceilings in state monopolies; and raising the thresholds on taxable income. The Finance Ministry has in past years raised the maximum share of dividends the state-owned enterprises need to pay the government to 15 per cent of after-tax profits.

"Any new leader will have to have the vision to recognise that there will need to be change and reforms," said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics. "Some of the vested interests that profit from the current strategy will have to be confronted - for example, the state-owned enterprises and state-owned banks," he said.

Li Shi, a professor at Beijing Normal University who has become known as "Mr China Income Distribution" believes the widening wealth gap threatens economic growth.

He uses an internationally recognised ratio, the Gini coefficient, to measure income distribution - where a Gini coefficient of zero expresses perfect equality and a Gini coefficient of one expresses maximum inequality. The danger line where social turbulence can easily occur is 0.4.

When China began to reform the planned economy three decades ago, the gauge was at 0.3. It has since risen more than 50 per cent, hitting 0.48 back in 2007.

According to Li's estimate, a rise of 2 percentage points is equal to 80,000 corrupted officials misusing 1 million yuan each.

Thanks to Deng Xiaoping's well-known support in the the early 1980s for allowing "some people to get rich first", Beijing's policies have largely focused on efficiency and growth while ignoring equality. The economy, now the world's second largest, grew an average of 10 per cent a year in the last 10 years. The nation has created more and more billionaires; a growing number of state-owned enterprises have made it onto Fortune magazine's Global 500 list.

Su said the effect of the reforms may not prove as dramatic. "The eventual plan may not completely feed the near-term thirsty," he said. "However, it will point out a direction and act as a push. The ripple effects will be shown gradually in the future."