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Winners and Losers in the New China

Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."
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Economists too often talk about policy changes in abstract, ignoring the drawbacks that even sensible reforms can bring. For years, analysts have been urging China to shift its economy away from heavy industry and toward services and consumption. Yet now that Beijing is taking heed, the costs are piling up.

Most obvious is a deepening gulf between winners and losers. A recent study from Peking University found that China has become one of the most unequal countries in the world. The richest 1 percent of households own a third of total wealth. As the government tries to transition away from coal and steel and toward tech and finance, this divergence is likely to worsen. 

In fact, it's already starting to. Regionally, the differences between China's old and new economies couldn't be starker. The rustbelt province of Liaoning, long reliant on steel mills, is now in recession. In finance-focused, high-tech Shenzhen, real-estate prices have risen by more than 60 percent in a year, the fastest rate in the world.

For workers, the shift has been just as harsh. Low-skilled laborers in fading industries are facing a contracting labor market and stagnant wage growth, even as state-sponsored venture capitalists plow stunning amounts of money into technology and pharmaceutical startups. Last year, China accounted for 90 percent of newly minted billionaires, overtaking the U.S. for the most in the world. This year, 1.8 million coal and steel workers are facing layoffs.

Signs of a growing divide are everywhere. Although reliable wage data is hard to come by, some consumption patterns are suggestive. Highway transportation, preferred by the Chinese everyman, is down 19 percent on the year. Air travel, still mostly for the rich, is up 11 percent. International flights are increasingly popular: Chinese flying to Japan to buy toilets, Thailand for beach holidays or Europe for luxury goods are faring quite well.

Yet in many ways, China remains a developing country. More than 600 million Chinese -- some 44 percent of the population -- are classified as rural residents, with an average nominal yearly income of $1,620. An urban worker earns nearly three times as much, enjoys better public benefits like schooling, and gets an enormous wealth boost from real-estate appreciation. 

As bureaucrats in Beijing continue creating jobs for bankers and subsidizing startups, this is creating some alarming tensions: The number of strikes and workplace protests surged to a record 2,774 last year, double the amount in 2014. 

China needs to address this divergence quickly. Although the government is offering cash to laid-off workers, the bigger problem is helping them make the transition to new jobs and new lives. Coal miners don't become medical technicians without training, or move to new cities without incentives.

The first step should be relaxing rules that prevent workers from moving. Successful economic transitions require letting labor flow freely, and restrictions on where migrants can work, and where their kids can go to school, only inhibit this process. Retraining programs are also crucial. Many rural towns in China have become magnets for online retailers, as small-time shop-owners enter the digital age; local residents need to have the wherewithal to capitalize on such changes.

Finally, Beijing must address housing costs. In most major cities, and especially those with flourishing economies, low-skilled and migrant workers have been largely priced out. One result is that rural-to-urban migration, once an unstoppable growth engine, has effectively ceased. A program to sell empty housing held by state-owned developers to migrants at affordable prices would help. So would easing restrictions on housing investment for lower-income groups.

China isn't alone in facing such problems. Yet its challenges are enormous. The yawning gap between winners and losers is making life much harder for a government seeking to boost growth and maintain stability. Without changes, China may very well end up with neither.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Christopher Balding at cbalding@phbs.pku.edu.cn

To contact the editor responsible for this story:
Timothy Lavin at tlavin1@bloomberg.net