Pacific Money

Inharmonious Society? China’s Rising Income Inequality

A new study shows that China’s wealth gap is growing. Can new leaders in Beijing bridge the divide?

The Gini coefficient, developed by Italian Corrado Gini and published one hundred years ago this year, is the most common method of measuring how equally income is distributed within an economy.  The Gini index can range from 0 (where everyone has exactly the same income) to 1 (where a single person has all income and the rest have none).  Obviously for a communist or socialist government, the aim would be to get a level as low as possible.

This last point is especially difficult for China as the sense of inequality has grown rapidly in recent years. This has occurred despite pledges by the now outgoing government of Hu Jintao and Wen Jiabao to achieve a “harmonious society” – which many took to mean a narrowing of the wealth gap.  The problem was highlighted in dramatic fashion last weekend when the Survey and Research Center for China Household Finance – jointly run by the China’s central bank the People’s Bank of China (PBOC) and the Southwestern University of Finance and Economics – published the results of a survey which showed China’s Gini-coefficient as 0.61 in 2010.

To put this number in context, of the major economies, only notoriously unequal South Africa has a higher coefficient. The United States, considered to be the bastion of unfair “Anglo-Saxon Capitalism,” is more equal, with a score just over 0.4. Although this latest Chinese survey of 8,438 households is not a massive sample size, it is pretty clear that China’s true measure is in the region where social unrest is considered to be a threat — more than 0.4. The more than 180,000 “mass incidents” which took place in 2010 — four times as many as a decade before — suggest that this is not merely a theoretically issue.. 

China stopped publishing its national Gini results in 2000, and the World Bank stopped in 2005 when it calculated China’s reading to be 0.42.  The Chinese Academy of Social Sciences (CASS), which often publishes interesting and stimulating research on China’s economy, calculated a Gini figure of 0.54 in 2008. In March of this year, shortly before his spectacular ouster, Bo Xilai, the former Party Secretary for Chongqing, stated that China’s coefficient had surpassed 0.46.  Earlier this year, the head of China’s National Bureau of Statistics claimed that the country was simply refining its methodology, in an attempt to counter suspicions that the ostensibly communist nation was hiding the extent of its widening wealth gap. 

A repressed financial system, toothless trade unions and corruption/rent-seeking by the rich and powerful have long been blamed for China’s dramatically worsening inequality.  A further factor, recently underlined in the excellent book China’s Superbank by Bloomberg News reporters Henry Sanderson and Michael Forsythe, has been the systematic and deliberate appropriation of rural inhabitants’ land for inadequate compensation — which the authors identify as the cornerstone of China’s local government urbanization model.  

This last reason pours some cold water on the common claim that urbanization automatically eases the income gap.  Other methods that could help the situation would be to take a larger portion of state-owned enterprises’ (SOE) dividends and distribute the wealth to poorer people through healthcare spending, for example.  Outright privatization of some of the SOEs would be another way to increase household income.   Allowing the poor better access to healthcare and benefits by abolishing the hukou system (which prevents migrant workers from accessing healthcare or education outside their home areas) would be another obvious boost in China’s income equality struggle. 

At the recent 18th Party Congress, China’s Communist Party again pledged to narrow the gap between rich and poor.  There are many methods available to policymakers trying to achieve this goal.  The question going forward is whether or not the current leadership can overcome entrenched interests and opposition and finally make some progress in making the country more equal, a task at which the outgoing leadership has clearly failed.