Opinion: One Reason for China’s New Emphasis on ‘Common Prosperity’ — Widening Wealth and Income Gaps

For centuries, economic thinking has revolved around two major topics: growth versus distribution, and efficiency versus fairness.

In the past few decades, the world has put growth and efficiency before distribution and fairness, which has given rise to an increasing wealth gap and fissures in society. Nationalism, protectionism and movements such as “Occupy Wall Street” have all gained momentum.

Now we are seeing a K-shaped recovery taking shape in the post-pandemic world, which is relying on excessive monetary stimulation. This has created deflation for the poor and inflation for the rich. Globally, the income and wealth gaps are becoming pressing issues.

The issue of distribution has been high on China’s agenda in recent years. The government made targeted poverty alleviation one of China’s three critical battles and the realization of common prosperity was included in the 14th Five-Year Plan, with East China’s Zhejiang province designated as a demonstration site. It’s worth asking what caused the shift of focus from efficiency to fairness in China? What is the status quo for income distribution in China? How can China achieve common prosperity?

The status quo

There are several worrying trends: the widening income and wealth gaps, and a downward trend in social mobility.

China has a relatively high Gini coefficient and difference among income groups. Thanks to measures including targeted poverty alleviation, these figures have been in decline over the past few years. In 2008, China’s Gini coefficient peaked at 0.491, but in the last few years it has gone down to between 0.46 and 0.47. As if sandwiched between the low-income and the high-income groups, the middle-income group has experienced the lowest income growth rate.

China’s wealth gap is more salient than its income gap. In 2020, the wealth gap increased despite the trend of alleviation in recent years. In fact, due to the cumulative effect, the level of wealth disparity tends to exceed that of the income gap. The same rule applies to the situation in China. Between 2000 and 2015, China’s wealth Gini coefficient rose from 0.599 to 0.711. In 2019, it fell to 0.697. However, the Covid-19 pandemic drove the 2020 figure back to 0.704. In 2020, China’s richest 1% held 30.6% of total wealth in China.

Property and financial assets, the main generators of wealth, are distributed unevenly among households. According to Credit Suisse’s Global Wealth Report 2021, gross assets in China rose by 14.6% in 2020 and wealth per capita grew 5.4%. Most of the increase was in financial assets, which rose 9.6% compared with 3.7% for non-financial assets.

A 2019 People’s Bank of China (PBOC) survey showed that property accounted for 70% of the household wealth while financial assets made up for 20%.

Stepping into the 21st century, China saw decreased social mobility and larger intergenerational wealth transfer. Now, inequality of opportunity is playing a bigger role in income distribution. It is increasingly difficult for individuals from disadvantaged backgrounds to get ahead, or for low-income earners to join the high-income group. Compared with the middle-income group, households at the extreme ends of the income distribution are less likely to move.

From 1996 to 2014, 46.5% of the surveyed had remained in the same social class as their parents. Over half (53.5%) moved up or down the social ladder with 41.8% ascending and 11.7% descending.

Grouped by region, cities showed a higher mobility than rural areas, but rural residents were more likely to move up socially. Of surveyed rural residents, 42.6% belonged to a higher social class than their parents. The figure for their urban counterparts was 39.8%. Between 2012 and 2014, the majority of households stayed in the same position in the income hierarchy, showing that it was unlikely for the poor to get rich or the rich to become poor.

The lowest-earning and the highest-earning households had the highest probability to stay in their respective social positions. An analysis on the correlation between parents’ and children’s wages between 2010 and 2015 showed that 47% of farmers’ children made a living as farmers after growing up. Of the children of parents with skilled occupations, 43.2% ended up working in the same professions. Compared with children of parents with middle-income jobs, children born in low-income and high-income groups were more likely to enter the same professions as their parents. Jobs in public services and political connections helped reinforce high-income earners’ social position. Meanwhile, medical expenses were the main cause of low-income earners’ falling under the poverty line, a phenomenon called “illness-induced poverty.”

The gaps between urban and rural areas, regions and industries

The urban-rural gap is the main contributor to the income gap in China. The regional gap and the difference between industries are also salient. The information and technology industry is the highest-paying while the sectors of agriculture, forestry, animal husbandry and fishery are the lowest paying. Wage differences among industries are larger in public entities than private ones.

In general, eastern, southern and central regions scored higher than western and northern regions in gross regional production and urban household wealth. In terms of gross regional production, southeastern China comes in at the top, followed by Central and western China. The Northeast and some areas in the West are at the bottom.

In 2019, the top four provinces with the highest GDP were Guangdong, Jiangsu, Shandong and Zhejiang province, all of which are costal areas in the southeast. Next came Henan, Sichuan and Hubei provinces in western and central China. Provinces in the southwest such as the Tibet autonomous region, Qinghai province and the Ningxia Hui autonomous region, and in the northeast, including Jilin and Heilongjiang province were lower on the list. The average disposable income in Shanghai and Beijing municipality reached 64,000 yuan ($9,843) and 62,000 yuan, respectively. The figure was 17,000 yuan in Tibet and Gansu province.

It is a rule of thumb that the wealthier a region is, the higher personal wealth there is. Also, the level of household assets is generally in line with regional GDP.

According to a survey from China’s central bank, the average amount of household assets in East China was 4.61 million yuan in 2019, 1.97 million yuan higher than in Central China, 2.53 million yuan higher than in western China and 2.96 million yuan higher than in southeastern China. Families in Beijing, Shanghai and Jiangsu province topped the list, while families from the far western Xinjiang Uyghur autonomous region, Gansu and Jilin province appeared at the bottom. An average household in Beijing municipality owned seven times more assets than one in Xinjiang.

The “2021 China Private Wealth Report” released by China Merchants Bank concluded that in 2020, 44% of China’s high-net-worth individuals lived in the eastern coast provinces and municipalities, namely, Guangdong, Shanghai, Beijing, Jiangsu and Zhejiang.

The global landscape

Since the 1980s, income distribution has pained many economies. The richest 1% of the world population held 16.9% of global wealth in 1981 — that number has grown to 19.3% in 2020, indicating a greater concentration of wealth at the very top.

In 2020, the Covid-19 pandemic drove up stock and real estate prices. While many were made richer, the interregional and regional wealth gap widened. Despite a shrinking GDP, global wealth grew by 7.4% in 2020. This made regions became polarized between affluence and poverty. Total wealth in North America and Europe grew by 10% and 9.8% respectively in 2020. The Asia Pacific region (excluding China) and China saw respective growth of 6.7% and 6.0%. Meanwhile, a mere 0.7% increase was observed in Africa and the economies of India and Latin America contracted. Credit Suisse’s Global Wealth Report 2021 stated that in 2020, 12.2% of adults owned 84.9% of the global wealth, representing a huge wealth gap. In 2020, the United Nations also announced that global inequality was at its worst in history and was still mounting.

Based on an economy’s development level and the trends in its income and wealth gap, countries could be categorized into four categories.

The first category is developed countries with a low income and wealth imbalance, such as Japan and Italy. Their Gini coefficient of income remains below 0.4 and Gini coefficient of wealth remains below 0.7. These countries have been viewed as developed countries for a long time and have kept income and wealth disparities at a lower level through effective distribution and redistribution policies.

The second category is developed countries with medium or high income imbalance but wide wealth imbalance, such as the United States. The Gini coefficient of income of the United States is not high, but in the environment of continuous quantitative easing, the rise of financial assets is different from that of nonfinancial assets, which promotes unbalanced growth of wealth.

The third category is developing countries caught in the income distribution trap, such as India. According to Kuznets’ hypothesis, the income gap in developing countries will first rise and then decline with economic development. However, if the income and wealth gap is too wide, the development of the national economy might be hindered, causing the country to fall into the middle-income trap.

The fourth category is developing countries with rising income and wealth imbalance but still at a low or controllable level, such as China. While developing their economies, such countries have kept income and the imbalance of income and wealth within a reasonable range so that they will not curb economic growth.

China belongs to the fourth category, as its income gap is at a medium to high level, while its wealth gap is at a medium to low level. China’s wealth and income gaps are smaller than those of the U.S.

According to the World Bank, China’s income gap is at a medium to high level, with its Gini coefficient of income higher than the warning standard of 0.4. In terms of the wealth gap, both the Gini coefficient of wealth and the proportion of wealth occupied by the top 1% of the population show that China’s wealth imbalance is still at a low to medium level. The Gini coefficient of wealth can measure the imbalance of wealth distribution, the higher the number, the greater the wealth gap. A coefficient of 0.7 means the wealth gap is relatively low, while anything over 0.8 indicates a great wealth gap. The Gini coefficients for wealth on Brazil, Russia, Germany and the United States have remained above 0.8 since 2000, indicating a wide wealth gap among their citizens. The Gini coefficient for wealth in France, Japan and Italy has remained low. Although China’s Gini coefficient of wealth increased rapidly from 2000 to 2010, it is still at a low to medium level.

With an aging population and lower birth rates, and the arrival of the “Lewis turning point,” China no longer has a demographic dividend and has begun to witness labor scarcity and capital surplus.

Major cities have begun to scramble for talent and improve the working conditions for laborers. At the same time, a large income gap leads to the increased social instability, so it is necessary to increase the share of labor in national income distribution, appropriately restrain capital, and pay more attention to equity and common prosperity in income distribution. This is conducive to high-quality development and is an objective requirement of economic and social development at this stage.

What is the global trend? It is to reduce the profits and monopolies of real estate, finance, education, Internet, and other industries, as well as the long-term squeezing of people’s livelihood and real economy caused by this, and vigorously develop the manufacturing industry, hard science and technology, the real economy, new energy, new infrastructure, capital market, etc. This is a great change and a great opportunity unseen in a century. It is important to understand and grasp this trend. Every person and every enterprise is ultimately the product of the times.

Ren Zeping is the chief economist and director of Evergrande Think Tank

Contact editor Michael Bellart (michaelbellart@caixin.com)

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