The key issue for China now is to focus on implementing bold, comprehensivereforms to rebalance wealth distribution
According to the 2011 Forbes Billionaires List, the BRIC countries (Brazil, Russia, India andChina), contributed 108 of the 214 new billionaires and accounted for one in four of the totalnumber, a jump from one in ten five years ago. The number of Chinese billionaires on the listnearly doubled.
In striking contrast, China still has about 150 million people living on less than one US dollar perperson per day and more than 60 percent of urban residents cannot afford an apartment.China's Gini coefficient, a key indicator of inequality, reached a record high of 0.49 in 2006 andhas been hovering around 0.5 in recent years, surpassing the "warning line". Many peoplebelieve that the income gap is actually far larger than the official figures suggest.
The fast growth of China's economy has fueled the rising number of wealthy individuals, whosewealth comes mainly from private businesses, property speculation, initial public offerings andhigh-earning jobs. Interestingly, the average age of Chinese millionaires is 39 years old, 15years younger than their Western counterparts.
Although historically the course of industrialization and modernization in pursuit of economicprosperity seems to lead inevitably to wealth disparity, the key issue for China now is to focuson implementing bold, comprehensive rebalancing reforms.
Adjusting China's development model means refocusing gross domestic product (GDP) growthtoward more "people-oriented growth", in order to boost the welfare of ordinary citizens. TheChinese economy's over-reliance on investment has aggravated the declining household shareof the national income, resulting in consumption making up just 35 percent of GDP. This figureis a record low for any major economy, and well below that of other developing countries suchas India.
To reverse this trend, various measures need to be taken to further raise household incomes,including enacting mandatory wage growth targets, spending more on social welfare programsand expanding affordable housing, as well as comprehensively reforming the personal incometax system.
A survey, conducted by the Shanghai Committee of the China Democratic League, has foundthat about 68 percent of the working population in the city is employed in the lowest-payingsectors, such as manufacturing, construction, catering and retail. The minimum monthly salaryis 1,120 yuan ($170), and despite ranking the second highest among Chinese cities, this isonly around 30 percent of the average salary in the city, down from 44.6 percent in 1993. Incontrast, an internationally accepted level is that a monthly minimum salary should be no lessthan 50 percent of the city's average income levels.
Obviously, the system of fair distribution according to performance should further reflect thelabor value in the market, but getting "the first income distribution" right is more importantbecause if there is something wrong with the first distribution, it is very hard to correct it througha second one.
The financial system must play a role in narrowing the income gap. Gradual liberalization ofinterest rates could be a better way to raise deposit rates, thus preserving households'purchasing power in inflationary periods. Meanwhile, raising the lending rates might be helpfulin curbing investment and transferring wealth from producers to households.
Given the current tightening liquidity environment, Chinese banks are starved for funds and areintensifying the competition for deposits through exploring innovative ways to deliver wealthmanagement products for high-value customers. As a result, wealthy individuals andcompanies are the largest beneficiaries of the banking system.
Considering the importance of employment created by small-and-medium-sized enterprises,Chinese banks should be developed on a more balanced, coordinated base, makingmicrofinance more accessible to both small businesses and average citizens to improveemployment and increase household incomes.
For decades, a widening income gap has been one of the problems faced by those countriesstuck in the "Middle Income Trap" both in Latin-America and Asia. Only a few countries such asJapan, South Korea and Singapore, have successfully avoided the trap. China faces a similarsituation despite its characteristics of a large population and fast-growing urbanization, and willnot maintain long-term sustainable growth without closing the gap between the haves andhave-nots.
This is not only an economic issue, it is also closely related to political theory and socialstability. Paul Collier, an Oxford University economist, examined data from nearly every countrygoing back to 1960. He found that above a certain income threshold, democratic countriesbecome less prone to unrest as they get richer, whilst autocracies tend to suffer higher levelsof unrest.
Usually, reforms in countries entering the middle-income development phase are fettered byspecific interests groups, which leads to rent seeking, speculation and corruption. Therefore, itis necessary for policymakers to contemplate a set of top-to-bottom steps on the road toreform.
Rebalancing an economy is never an easy process, since it requires both a strong stomach forreform and also a suitably cautious approach, combined with a true sense of the moment.
The author is chairman of Board of Directors, Bank of China.
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