China Wealth Gap to Stay in Danger Zone, Government Adviser Says

China Wealth Gap to Stay in Danger Zone
The Li family sit in their home in Loudi, Hunan Province, China. Photographer: Nelson Ching/Bloomberg

China’s income gap will persist at a “dangerously” high level over the coming decade, putting pressure on the nation’s incoming leaders to curb corruption and state control of industries, according to a government adviser.

China’s Gini coefficient, a measure of inequality, may hover around 0.5, Li Shi, who helped draft a government plan on income distribution, said in an interview last week. The government hasn’t published a countrywide Gini figure since 2000. The index ranges from 0 to 1, readings at 0.4 or higher are used by analysts as a gauge of the potential for social disturbances.

“The situation is very dangerous now, and it’s a life-or-death battle for the new leaders to fight,” said Li, 55, executive dean of Beijing Normal University’s China Institute of Income Distribution, who compiled his own Gini survey in 2007. “Many reforms have been delayed in past years, but I don’t think China has the luxury to delay any more.”

Ousted Politburo member Bo Xilai drew attention to the Gini coefficient in March, saying that the figure exceeded 0.46. His downfall also heightened focus on the role of wealth and influence in the Communist Party, with his wife convicted last month of murdering British businessman Neil Heywood, and his former police chief this week convicted of covering up the crime.

With economic growth for 2012 at risk of the weakest performance since 1990, Li sees a slowing in wage gains that will counter improvements that authorities are championing in social security coverage. The wealth gap adds urgency to the need to distribute income from the “monopoly profits” garnered by China’s state-owned enterprises, according to Li.

Power Transition

Vice President Xi Jinping and Vice Premier Li Keqiang --who are forecast to head the next group of leaders in the Communist Party’s once-in-a-decade power transition by year-end -- have yet to publicly lay out their policy priorities. China’s authorities have for eight years been working on a blueprint to boost citizens’ share of economic growth.

“It’s a well-established consensus that inequality is a huge economic and political problem and that it needs to be resolved if China’s growth is going to resemble anything that could be called sustainable,” said Alistair Thornton, an economist in Beijing at IHS Global Insight. “We haven’t seen enough in terms of reform to warrant the view that we are moving in the right direction.”

China doesn’t deliberately hide its Gini coefficient, and will release the data once it improves its survey methods, Ma Jiantang, the government’s statistics chief, said in March. The rural Gini coefficient was 0.3949 last year, state news agency Xinhua said in August, citing a survey by Central China Normal University’s Center for China Rural Studies.

2007 Survey

Li said the survey of 20,000 Chinese households he conducted in 2007 determined a coefficient of 0.48. The figure has risen from 0.302 in 1978, when the Communist Party began to open the economy to market forces, according to a 2008 report by Chen Jiandong at Southwestern University of Finance and Economics in Sichuan province.

China’s rapid economic growth has helped pull much of its population out of poverty, along with swelling the nation’s ranks of billionaires. The gross domestic product of the world’s most populous nation increased about 10 percent on average in the past two decades. World Bank data show that 600 million people were lifted out of poverty from 1981 to 2004.

Now, the GDP growth engine is moderating. Song Guoqing, a central bank adviser and Peking University professor, sees expansion of 7 percent to 7.5 percent in the first half of 2013, while Yuan Gangming, an economist with the Chinese Academy of Social Sciences, said growth may slow for a ninth quarter to below 7 percent in the first three months of the year.

Stocks Slump

Weakening prospects for the economy contributed to a 4.6 percent slump in the Shanghai Composite Index last week, the most in 11 months. The gauge rose 0.3 percent yesterday.

The utility of Gini coefficient readings as a predictor for social unrest may be limited, with China’s reading estimated to be little different than the U.S. -- at 0.45 for 2007, according to the U.S. Central Intelligence Agency’s World Factbook.

In China, the number of so-called mass incidents -- strikes, protests, riots -- doubled in the period from 2006 to 2010 to 180,000 a year, Sun Liping, a sociologist at Beijing’s Tsinghua University, wrote last year.

“Many social problems today are actually related to income gaps,” Li said. “Public trust and confidence in the government has been jeopardized, and if the new leaders want to rebuild trust and confidence, it must deliver something real.” He said many resources are in hands of large state-owned big companies, which are enjoying “extraordinary monopoly profits.”

Distribution Plan

Chinese authorities started to draft a plan on income distribution in 2004, Jin Aiwei at the China Macroeconomic Information Network -- a group affiliated with the National Development & Reform Commission, or NDRC -- wrote in an Aug. 27 article in Economic Information Daily. The newspaper is published by Xinhua.

Zhang Ping, the head of the NDRC, China’s top economic-planning agency, said in a report to national lawmakers on Aug. 29 that his agency was working “intensely” on the income-distribution reform plan, according to Xinhua.

“The saving rate of lower-income households is much lower than that of higher-income households,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong and a former World Bank economist. “If a key objective is to increase consumption then indeed redistributing from richer people to poorer people will definitely increase consumption.”

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