The gap between China’s rich and poor is growing

By Hazrat Hassan

In its 34 member states, the richest 10% of the population earn 9.6 times the income of the poorest 10%. There is no standard measure of inequality, but most indicators suggest it slowed or fell during the financial crisis and is now growing again. The Organization for Economic Cooperation and Development (OECD) warns that such inequality is a threat to economic growth. The report says this is partly because there is a wider gap in education in the most unequal countries, which leads to a less effective workforce. OECD member states include most of the European Union as well as developed economies such as the US, Canada, Australia and Japan. One of the factors that the OECD blames for growing inequality is the growth in what it calls non-standard work, which includes temporary contracts and self-employment.

The OECD says that since the mid-1990s more than half of all job creation in its member states has been in non-standard work. It says that households dependent on such work have higher poverty rates than other households and that this has led to greater inequality. It also says that tax and benefit systems have become less effective at redistributing income. On the other hand it says that one of the factors limiting the growth in inequality has been the increasing number of women working. The report says that one of the few areas where inequality has not been growing in the last 30 years has been Latin America, although levels of inequality were much higher there to start with.

Currently, China takes the second place in the number of millionaires worldwide after the United States. What makes this even more astonishing is how fast the number of Chinese millionaires is increasing. However, poverty is still pressing issue for China and one of the major concerns of the Chinese government.[1]

In 2012 approximately 1.5 million millionaires lived in China. In 2013 the number increased further to 2.4 million. Eventually, the number of millionaires is projected to double again until 2015. Without a doubt impressive numbers. But according to senior government development official Zheng Wenkai over 82 million Chinese still live on less than about US$1.25 a day. Hence, plenty of people that did not benefit from China’s incredible growth rates so far. This number is even higher if the World Bank’s definition of extreme poverty is taken into account. Those are people who have less than US$1 a day. Thus, as Wenkai admits the number of poor Chinese can be considered to be actually closer to 200 million. This implies that every sixth Chinese person is poor. The fragments of Chinese peoples have not only the insufficient of capital but also have no access to clean water, electricity and health care. They frequently live in rural areas that are regularly hit by natural disasters such as earth quakes, droughts, and floods.[2]

Although per-capita income has grown and the number of people living on less than a $1.25 a day has plummeted, income inequality has skyrocketed, the economists said. The top quintile of earners now pulls in nearly half of total income while the poorest quintile of earners account for fewer than 5%.

“China’s widening income inequality is largely a reflection of faster income growth among the rich, rather than stagnant living standards among the poor,” the two economists said.

With an estimated 2.4 million millionaire households, China now has more than any country but the U.S. China’s credit-fueled investment and export-led development model are likely the primary drivers of the sharp increase in income inequality over the last three decades, they said.

China’s government has promised to narrow the gap between rich and poor, but differing measures of income may make progress hard to gauge.[3]

While China’s economic growth may have exceeded market expectations in the June quarter, there are growing concerns that the country’s goal-orientated growth target is merely intensifying the divide between the rich and poor. Debate on the subject came to the fore over the weekend when China’s vice finance minister, Zhu Guangyao, said China’s GDP will reach 100 trillion yuan ($16.11 trillion) by 2020, taking China’s per capita GDP to $10,000, up from $7,485 in 2014.

China’s Gini coefficient, a gauge of economic inequality based on the income distribution of a nation’s residents has grown sharply over the past two decades, reaching 0.469 in 2014, the report says, citing data from China’s statistics bureau.[4]

The gauge has now slipped for six consecutive years, indicating that the divide between rich and poor is growing. Yu Pingkang, chief macroeconomic analyst at Huatai Securities, believes the government needs to do more ensure the gap doesn’t continue to grow.

Authorities should accelerate reforms in wealth redistribution, such as salary cuts among senior executives of State-owned enterprises and the reform of the country’s pension system to allow society to equally enjoy the benefits of economic development.[5]

Concerns have emerged over whether China’s economic growth would be reflected incitizens’ paychecks or would only widen the wealth gap, after a senior Chinese official saidthat the country’s per capita   GDP would reach $10,000 by 2020. Considering China’s per capita GDP in 2014 reached 46,531 yuan ($7,485), $10,000 is attainable, but the government still needs to make more effort to control the gap, said Yu Pingkang, chief macroeconomic analyst at Huatai Securities.[6]

However, the income gap is also reflected in social attitudes, which the Peking University report found were increasingly stratified. That is to say, there’s a mental gap between China’s “haves” and “have-nots” when it comes to evaluating how the country (and its leaders) are doing. Concern over inequality in China has spawned caustic suggestions that the country belongs only to elite few. But, predictably, those who are experiencing financial success are far less knowing of the wealth gap.

In fact, the Peking University report suggested that China’s middle class has the potential to serve as “social stabilizers,” because they tend to have more positive outlooks on the wealth gap, more confidence in party companies, and more upbeat evaluations of government performance.[7]

What China should be concerned about in the meantime are the extreme differences in wealth and incomes. According to a study published by Beijing University 1% of the population controlled more than one third of the entire wealth in 2012. The bottom quarter, however, controlled only 1% of the wealth. While the progress made in fighting poverty is remarkable the gap between the poor and the rich is considerably widening. The last thing the Chinese government could use in addition to demands for more democracy are intensified social tensions evoked by increasing inequalities in regards of income and wealth. Especially in times of slower growth and when the previously made promises are increasingly difficult to keep.[8]

References

1. Talley, China income inequality among world’s worst. Financial Time, Beijing, Vol.29,Issue on JANUARY 14, 2016,release available at https://next.ft.com/content/3c521faa-baa6-11e5-a7cc-280dfe875e28.
2. Chen L. W, China’s Income Inequality Surpasses U.S., Posing Risk for Xi. Bloomberg,Vol. 37,Issue April 29, 2014,release available at http://www.bloomberg.com/news/articles/2014-04-28/gap-between-rich-poor-worse-in-china-than-in-u-s-study-shows.
3. Liang Jun, B, China news. Per capita GDP target sparks wealth gap concerns,issue July 27, 2015,release available at http://en.people.cn/n/2015/0727/c90000-8926349.html.
4. Lichtig  A, Is China rich or poor? Why? Quora, Issue on Jul 22, 2013, release available at https://www.quora.com/Is-China-rich-or-poor-Why.
5. njhhwerner, The Rich and Poor in China. Waltham Economy of Asia Review,issue on October 26, 2014, release available at https://brandeisear.wordpress.com/2014/10/26/the-rich-and-poor-in-china/.
6. SCUTT, D, The gap between China’s rich and poor is growing, which spells trouble when 300 million live below the poverty line . Business Insider , issue on JUL 27, 2015, 3:08 PM, release avaible at http://www.businessinsider.com.au/the-gap-between-chinas-rich-and-poor-is-growing-which-spells-trouble-when-300-million-live-below-the-poverty-line-2015-7.
7. TALLEY, I, China Is One of the Most Unequal Countries in the World, IMF Paper Says. The Wall Street Journal, issue on Mar 26, 2015,release available at http://blogs.wsj.com/economics/2015/03/26/china-is-one-of-most-unequal-countries-in-the-world-imf-paper-says/.
8. Tiezzi, B. S,China’s 1 Percent Owns 1/3 of Wealth. The Diplomat,issue on January 15, 2016, release avaible at  http://thediplomat.com/2016/01/report-chinas-1-percent-owns-13-of-wealth/.