Major new economic plan seeks to address income disparities
With the historic once-in-a-decade
18th Communist Party Congress slated to begin tomorrow, the incoming leadership
in Beijing recognizes that one of its most critical tasks is to ensure that
internal conflict doesn’t spin out of control and jeopardize the existence of
the party itself.
It is not an idle concern.
Undeniably, the past 30 years have seen headlong progress in lifting an
estimated 400 million people out of poverty and increasing GDP growth fivefold.
However, widening income inequality and wealth disparity have become a hotspot
of public grievance and domestic tension. It has been famously reported that
the country endures as many as 180,000 to 200,000 protests, riots or mass
demonstrations a year – averaging about 500 every day, leading to the
popularity of the sarcastic yet candid expression “rich nation poor
population.”
For eight years, the Communist
Party has been stalled by entrenched interests in working on income
distribution reform. After three draft revisions, outgoing Premier Wen Jiabao
has promised its publication before the year end. The third revision has been
completed and approved by top Chinese leadership, according to mainland media
reports. It awaits the arrival of Xi Jinping and Li Keqiang to be unveiled in
order for them to take celebratory credit for populist policies.
This is a matter of political
consideration. As the next president-in-line, the princeling Xi Jingping is
sure to do all he can do consolidate Communist Party rule.
In this regard, Xi will tap Li’s
broad expertise in economics, social and urbanization. Incoming Premier Li
Keqiang, a protégé of outgoing President Hu Jintao and a strong believer in
transformation wrought by urbanization, is likely to have played a key role in
defining the income distribution reform, as well as setting policies concerning
social welfare housing and healthcare reforms.
The document should be regarded
as a serious undertaking to expand China’s middle class and drive the
long-awaited consumer society that western exporters have been hoping for ever
since the country began to open up in the early 1980s. There are obviously
roadblocks in the way of the plan. The state-owned enterprises, which have
taken the lion’s share of the development dollars so far, reportedly have been
resisting, although they have finally acquiesced to its implementation.
Given the broad scope of the
reform plan, and the fact that that it can be expected to encounter resistance
on the ground, the implementation of the plan will follow China’s proclaimed
gradualism doctrine. Beijing has abolished the agriculture tax, twice lifted
the deductibles for individual income tax levels in recent years and nearly
doubled the threshold for defining poverty. All are designed to strengthen
support for grassroots workers.
Furthermore, fiscal revenue
growth has been outpacing income growth. This suggests government is also
capable of boosting wage increase through fiscal transfer. According to the
plan, which has been discussed in mainland newspapers and other forums, the
minimum wage is to be pushed steadily higher and low-end manufacturing is
expected to be migrated to the rural countryside, reinforcing the government’s
so-called Go-West infrastructure build-out. The rising middle class is expected
to expand consumption and gradually free China from its reliance on investment
and export. The near-term sacrifices that SOEs need to make will be more than
compensated by prolonged growth in the broader economy which should deliver the
resources to the banks and other large-state red chip stocks to keep them from
harm.
To provide some understanding of
the foundations of the discontent – in addition to often-unfair policing and
arbitrary land acquisitions, the wage contrast from sector to sector is stark.
For 2011, jobs at state-owned financial institutions paid an average of
RMB91,364 annually while government jobs in the agriculture sector earned as
little as RMB20,393. Company ownership structures are an even more dominant
factor in determining the take-home pay of the average worker. The average
annual wage for privately-run companies is approximately half of those of the
state-affiliated enterprises.
Different sectors, very different wage rates
Source: National Bureau of
Statistics
The reasons are two-fold. First,
party businesses and SOEs have commanded most of the power and dominance of the
economic landscape, tracing to the days of the command economy. When the
economy took off in the past decade, the SOEs, very much because of their
respective monopolistic positions, were able to collect the accompanying growth
in profit.
A lack of incentive to maximize
shareholder profit, combined with no hard-and-fast rules to distribute
dividends – although that is gradually changing – have meant that SOEs paid
staff handsomely in both salary and perks. Described as “interest groups” that
interfered with the progression of previous drafts of the reform, the SOEs
finally gave in after eight years of hard negotiation. They realize that their
fortunes are tied to continuing populist support of the party regime.
The income distribution reform is
thus expected to have an impact on benefits and wages payable to SOE staff,
along with stronger enforcement of anti-corruption practices to improve public
opinion.
In April, Wen openly labeled the
Chinese banks as too powerful, saying on China National Radio: “Frankly, our
banks make profits far too easily. Why? Because a small number of major banks
occupy a monopoly position, meaning one can only go to them for loans and
capital.” To counter this, Beijing has already given some flexibility to banks
in setting their own lending and deposit rates to spur banking sector
competition.
Rural incomes trail urban ones
Source: NBS
The second reason for the huge
income gaps is that salaries for unskilled workers have been artificially
suppressed by rock-bottom minimum wage rates. As illustrated by the chart
above, the monthly minimum wage set by cities and provinces stands at the
low-to-mid RMB1,000 level.
In today’s China, these salaries
simply do not get anyone anywhere. These rates are earned primarily by migrant
workers who graze for labor-intensive positions in privately run companies as
they have few skills and no resident registration status. More often than not,
they must leave their parents and children in the countryside.
Rock-bottom monthly minimum wages for migrant workers
Source: Local government
announcements
China doesn’t publish updated
data on the degree of wealth gap in its society. We combined a piecemeal Gini
coefficient from studies and comments by the World Bank (1981-2005), China’s
National Development and Reform Commission (2010), and Beijing Normal
University (2007, 2012) to create the chart below. A Gini index above 40
implies that wealth inequality has entered a dangerous state. A 2007 survey by
Li Shi at Beijing Normal University found China had risen to 48 at that time.
Li thinks it's now close to or at 50.
Wealth Disparity: Headed in Wrong Direction
Source: World Bank, NDRC, Beijing
Normal University
Steve Wang
Business & Investment Opportunities
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