China's Growing Income Gap

It takes about three hours by bus from the glitzy malls of central Beijing to reach Yongfengtun, a farming village northwest of the capital that has quadrupled in population, to 20,000, over the past few years. Here one finds a gritty version of a Chinese bedroom community. Grimy storefronts advertise cheap clothing, shoes, and budget mobile-phone service. Mangy dogs root through piles of trash on the bicycle- and pedestrian-crowded streets.

Yongfengtun's streets may be rundown, yet they attract thousands of migrant workers and the so-called ant tribe (cash-strapped urban youth) from across all China. "It's cheap!" says one 23-year-old, a recent college graduate who pays $39 a month for a 65-square-foot apartment. "Heat costs money," he says ruefully as he kicks a pan of water for washing laundry that has frozen solid. "There is no way I could afford an apartment in central Beijing," with rents probably 10 times higher for a comparable place, he says.

It's not as if incomes are stagnant in China—anything but. In the first half of 2010 per capita income rose 13 percent in the countryside, to $935 a year, and 10 percent in the cities, to $2,965 a year. Nevertheless, swelling slums in the suburbs of Beijing, Shanghai, and Guangzhou attest to a yawning wealth discrepancy between thousands of newly minted rich and millions of poor.

China already is showing levels of inequality comparable to the Philippines and Russia and is far less egalitarian than Japan, the U.S., and even Eastern Europe, according to Li Shi, an authority on income distribution trends at Beijing Normal University. Official figures show rural incomes are less than one-third those in cities, with the top 10 percent of urban Chinese earning about 23 times that of the poorest 10 percent—a ratio that is almost certainly understated, according to Li. "You can find increasing income inequality almost everywhere in China today," he says.

One reason is a system that blocks an estimated 150 million or more rural migrant workers from gaining access to benefits such as health care, education, and pensions available to urban residents. As a result, migrants are forced to save more of their wages to cover medical expenses and their retirements, says Li. Their incomes are also getting pinched by higher food prices (inflation is hovering around 5 percent) and rising housing prices (up 6.4 percent in December on an annual basis).

China's Gini coefficient, an income distribution gauge used by economists, worsened from below 0.3 a quarter-century ago to near 0.5 today, says Li. (The measure, named after Italian statistician Corrado Gini, ranges from 0 to 1.) Poverty researchers recognize anything above 0.4 as potentially socially destabilizing.

China's wealth gap may be worse than official statistics indicate. The incomes of better-off families are understated, says Wang Xiaolu, an economist at the independent National Economic Research Institute in Beijing.

Undisclosed income, which Wang says could add up to $1.4 trillion annually, ranges from kickbacks to businesses or government to perks such as subsidized housing offered by state-run companies. If so, the wealthiest 10 percent of the population earned 65 times that of poorest 10 percent—not the 23 times shown by government data.

President Hu Jintao's government is keenly aware of the problem. Policies aimed at lifting incomes include the 2006 abolishment of the agricultural tax, new central and local government mandates to fund nine years of free education, improved health care, and the construction of low-income housing.

Further narrowing of the income gap will require changes in fiscal policy, says Louis Kuijs, a World Bank economist in Beijing. Expanding government revenues beyond taxes on wages to include levies on property, as well as on income earned from capital gains on real estate and stocks, is one step, say Kuijs and economist Wang. Continued reform of China's household registration system, to allow migrants more access to social welfare benefits, is also necessary. A survey done last September by Horizon Research Consultancy Group, a Beijing researcher, showed a drop in life satisfaction and declining confidence about China's future, despite the country's double-digit growth rates. With food and housing prices rising, "people feel their quality of life has gone down," says Victor Yuan, founder and chairman of Horizon.

The bottom line: The gap between rich and poor in China is wider than generally realized and could create political problems for Beijing.

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