China will need to reform tax, welfare and labour policies if it is to reign in inequality and create “common prosperity” for all by 2035, economists say.
Following the Central Committee’s fifth plenum in late October, President Xi Jinping said doubling the size of China’s economy by 2035 was within reach, but the country must distribute the fruits of development more fairly.
In outlining his 15-year vision for China, Xi said the country “must achieve substantial progress towards common prosperity in a more noticeable way”, indicating renewed focus on addressing the country’s wealth gap in coming years.
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Former leader Deng Xiaoping said the goal of Chinese socialism was to achieve common prosperity for all, although it remains a distant vision.
It’s very difficult to achieve the ultimate goal of common prosperity, but at least China is determined to make more visible progress,
China’s rapid growth in the past four decades has lifted living standards across the country – pulling tens of millions of people out of poverty – but it has also coincided with a sharp widening of inequality.
“It’s very difficult to achieve the ultimate goal of common prosperity, but at least China is determined to make more visible progress,” Li Xunlei, chief economist of brokerage firm Zhongtai Securities, wrote in a note published on Friday.
Li said China would need to enlarge the number of middle-income earners and expand basic social service coverage to narrow the gap in living standards.
Analysts agree Xi will face an uphill battle to rein in inequality, which widened under the watch of his predecessors as China transformed from a dirt poor, predominantly rural country to the world’s second largest economy.
China is home to about four out of every 10 billionaires in the world, with the country minting 36 new billionaires between January and July, according to the latest billionaires report published by UBS investment bank and accounting firm PwC last month.
The combined wealth of China’s 415 billionaires is about US$1.68 trillion, roughly the size of Russia’s total gross domestic product and equivalent to the world’s 11th largest economy if it were a single economic entity.
The spending power of China’s most affluent has made the country a magnet for global luxury brands. Chinese consumers are set to account for about half of global spending on high-end brands this year, a rise from 37 per cent in 2019, McKinsey & Company has estimated.
Yet, 600 million of China’s 1.4 billion-strong population still earns an average monthly income of 1,000 yuan (US$150) or less, Premier Li Keqiang said in May.
Though few people in the country are at risk of going without food, clothing or basic shelter, China’s rapid development since the 1980s has stoked a wealth gap unmatched in its modern history, analysts said.
Steve Tsang, director of the SOAS China Institute in London, said China’s current wealth and income inequality “is the most extreme since the founding of the People’s Republic of China [in 1949]” and could threaten social stability “if the expansion of the economy stops or grinds to a halt”.
China’s Gini coefficient, a measure of income inequality, stood at 0.465 last year, a small drop from 0.468 in 2018, according to official statistics. The coefficient ranges from 0 to 1, with the higher the reading the greater the inequality.
A level of 0.4 is usually regarded as a red line for inequality. China’s wealth gap is close to the level of the United States, which recorded a reading of 0.481 in 2019, and much higher than Japan or South Korea.
According to the most recent figures from the World Inequality Database, the bottom 50 per cent of China’s population owned 14 per cent of national income in 2015, about the same share that was owned by the top 1 per cent.
In 1978, when China started its economic reform, the bottom 50 per cent owned around 27 per cent of the national income – similar to Scandinavian countries today.
The rapid rise of inequality in China over the past four decades has confounded some observers like French economist Thomas Piketty.
“Given that Europe has demonstrated the possibility of achieving prosperity while limiting inequality, it is not clear why Chinese socialism should tolerate levels of inequality on a par with American capitalism,” Piketty wrote in his latest book, Capital and Ideology.
Despite his first book, Capital in the 21st Century, being a runaway success in China, his latest was not published in China because he refused to allow China-related chapters to be censored.
Raymond Yeung, chief Greater China economist for ANZ Bank, said extreme inequality in China was not only an ideological embarrassment for Beijing, but a serious economic problem.
“China needs to expand its middle-income population to sustain domestic consumption and the dual circulation strategy,” Yeung said, referring to China’s new economic strategy unveiled in May to rely more on domestic consumption to fuel growth.
Xi’s emphasis on “common prosperity” could lead to more social welfare policies for low-income groups after “absolute poverty” was eliminated, Yeung added.
The Chinese president is expected to announce the elimination of absolute poverty at the 100th anniversary of the Communist Party in July next year.
Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, a finance ministry think tank, said China would try to create a level field in “opportunities and public services”, instead of increasing taxes on the rich. China’s top rate personal income tax rate is already 45 per cent.
Still, some analysts are sceptical the government can adequately meet its target to narrow the wealth gap without committing to major reform.
Li Shi, a professor at Zhejiang University who is an expert on income distribution, said at a forum in Beijing last month that “income distribution reform is very complicated and there won’t be progress without large-scale changes” in taxation and labour market liberalisation.
“Our research finds that the existing taxation and social welfare payment system has failed to narrow income inequality. In fact, they have actually made inequality worse,” he said, according to the transcript of his speech published by the School of Economics of Renmin University of China.
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