China Approves Income Plan as Wealth Divide Poses Risks

China’s State Council approved an income-distribution plan intended to tackle the nation’s wealth gap, with the government describing the task as huge, complicated and unable to be completed in a single step.

The 35-point blueprint targets boosting minimum wages to at least 40 percent of average salaries, loosening controls on lending and deposit rates and increasing spending on education and affordable housing. State-owned enterprises should contribute more to the treasury, according to a statement yesterday on the government’s website.

The gap between rich and poor poses risks for a new Communist Party leadership, headed by Xi Jinping, that’s seeking to maintain a six-decade-long grip on power and sustain the nation’s expansion by boosting domestic demand. The key question is how effectively the government implements the policies, according to analysts at Nomura Holdings Inc., Societe Generale SA and Bank of America Corp.

“It’s a good plan that came a little bit late,” Yuan Gangming, a researcher with the government’s Chinese Academy of Social Sciences in Beijing, said in a telephone interview. “The income gap in China is so big now that it brings huge risks of derailing China from its growth path.”

The nation’s Gini coefficient was 0.474 in 2012, statistics bureau data showed last month, above the 0.4 level used by analysts as a gauge of the potential for social unrest.

Maintaining Growth

Increasing consumption may be key for maintaining growth as JPMorgan Chase & Co. forecasts that the pace of the nation’s expansion may slip to 6.5 percent by 2020 compared with 10.5 percent over the past decade.

The Shanghai Composite Index, rose 0.1 percent as of 9:38 a.m. local time, headed for an eighth straight gain in the benchmark stock gauge.

The plan, under development for several years, was most recently due to be released by the end of 2012. Caijing magazine reported in December that the government couldn’t reach a consensus on a draft by the National Development and Reform Commission. The Communist Party next month will complete the second phase of a once-a-decade power transfer that is forecast to see Xi succeed Hu Jintao as president and Li Keqiang replace Premier Wen Jiabao.

“Deepening reform of income distribution is a very huge and complicated project, and it can’t be done in one step,” the government said. Policy makers aim to raise pay for the poor and rural residents and tackle hidden and illegal income, according to the statement.

Boost Contribution

The guidelines include directives such as calling for state-owned companies under the central government to boost their contribution of returns on equity to the treasury by 5 percentage points in the five years through 2015, the plan said. That’s a “very disappointing” increase because it’s too small and will only partly be used for the general public, said Wang Tao, chief China economist at UBS AG in Hong Kong and a former International Monetary Fund researcher.

The blueprint also calls for capping salaries of senior managers at state-owned enterprises and says their pay growth should be lower than that of the average wage of workers.

The plan reiterated previously announced goals including doubling per-capita income from 2010 to 2020 and expanding a property-tax trial. HSBC Holdings Plc estimates the income target would signal real growth of about 7 percent a year.

Redistribute Wealth

The property tax “is indeed a very important way to redistribute from the wealthier to low income families,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. At the same time, “the resistance to this new property tax is furious, so how it will be designed and implemented is a big question mark,” Shen said.

CASS’s Yuan said state companies need to contribute more to the treasury, the government should intensify a crackdown on illegal income and poor people must receive more social welfare coverage after three decades of rapid development in China.

“At the same time, I am not very optimistic about the implementation of the plan,” Yuan said.

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