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China’s Widening Income Gap

[Editor’s Note: This report by a Xinhua research team provides a sobering view of China’s social economic disparity. Published on the government media Jing Ji Can Kao Bao (Economic Information Daily), the report reveals some sensitive data that are unflattering to China. Although, similar data has been widely reported outside of China, reading them on the Chinese media is somewhat unusual as it is generally against the party’s nature to reveal bad news. The publication of this report may be an indication of the government’s increasing inability to conceal facts from the public. It may also be a decoy to divert people’s attention from more serious issues.

The first part deals with the widening income gap in China. The second part presents various color-coded income types. Many of them are illegal; most are hidden. It paints a disturbing picture of today’s society in China.

The following is a translation of the excerpts of the report. Subtitles were added by the editor.]

Part I – Economic Polarity Exceeds the Danger Zone

“In the past few years, income gaps between regions, businesses, social groups, and rural and urban populations have been growing. As a result of the lopsided redistribution system, a small segment of the population has been getting richer, while the majority sees little opportunity. As a key indicator of economic polarity, China’s Gini coefficient has exceeded the “danger zone.” The problem is increasingly becoming a focal point in society.”

The Rich Get Richer and the Poor Get Poorer

“The Gini coefficient shows that the polarity in China is approaching the point of social intolerance, or the ‘danger zone.’ According to Professor Chang Xiuze from the National Development and Reform Commission’s (NDRC) Macro Economic Research Institute, per widely recognized World Bank calculations, China’s Gini coefficient is 0.47. ‘Ten years ago, it was 0.4, which was an internationally accepted warning line. Since then, the coefficient has been increasing steadily, year after year. The economic polarity has exceeded the threshold of normalcy,’ stated Professor Chang.”

“According to Su Hainan, director of the Wage Research Institute under the Ministry of Human Resources and Social Security, the growing income gap is spreading to multiple levels of society. Currently, the Urban-Rural income ratio is 3.3, whereas the maximum ratio in the rest of the world is about 2.0. The salary disparity among various industries is also significant: the ratio between the highest and lowest paying industries is 15. The average salary of executives from state owned companies is 18 times that of the working level employees. On the average, these executives make 128 times more than the average citizen.”

“Li Shi, director of Beijing Normal University’s Income and Poverty Research Center, has participated in four major social income studies since the 1980s. He claims that the income disparity between the top 10% and the bottom 10% of the population increased from 7.3 in 1988 to 23 in 2007.”

“According to Tang Jun, secretary general of the Social Policy Research Center under the Chinese Academy of Social Sciences, ‘In recent years, income for both the poor and the rich has grown. However, when considering their spending patterns, the low income families have spent their money primarily on food and other necessities, and these goods are heavily susceptible to inflation. Therefore, in reality, the poor are getting poorer and the rich are getting richer.’”

Real Estate, Mining, and Stocks Are Sources of Explosive Profits

“In recent years, land, natural resources and capital have demonstrated their dominant influence over wealth redistribution. Real estate, mining, and the stock market have become the most profitable enterprises. With their instant, astronomical income, a handful of people have suddenly become China’s new tycoons.”

“Per Forbes China’s Richest List, among the top 400 wealthiest people, 154 are real estate developers; among the top 40, 19 are in real estate; five of the top 10 richest persons in China made their wealth from real estate. Real estate represents a major portion of China’s wealth.”

“Tang Jun believes that the key asset in real estate is land. According to the current land policy, the government and the developers together form a monopoly in selling and buying land. They buy land from peasants at low prices and sell houses at high prices. The developers and local governments then share the explosive profits resulting from these real estate deals. With skyrocketing housing prices, those who do not own a home have been left far behind, with little hope of ever making it.”

“A small group of people also possess the non-renewable mineral resources, and, as a result, are rapidly getting rich. The reporter learned that in recent years in coal rich Zuoyun County in Shanxi Province, several hundred coal mine bosses have become multi-millionaires. Ironically, the local peasants’ average annual income is only 4,359 yuan, ($640), which is 400 yuan below the national average. ‘Resource allocation is unfair, which intensifies the lopsided distribution of wealth in society,’ commented Professor Chang Xiuze of the NDRC. ‘This is directly related to the lack of laws affecting mineral resource ownership. The issue is highlighted by the following factors: inadequate resource cost structure, a low mining tax, low mining costs, and no environmental responsibility. These are the secrets that enable the mining bosses to become abnormally rich, and these are the root causes of the dysfunctional distribution policy that results in the increasing income gap,’ said Professor Chang.”

“Some experts have observed that, in recent years, the super hot capital market, especially the surge of speculative investments, has intensified the cumulative effect of capital and increased the income gap between the capital market and industrial activities. As a result, the rich are getting richer and the poor are becoming poorer.”

“Hip Decides Wallet”

“Scholars such as Professor Wei Jie of Tsinghua University and Mr. Shi Ying, deputy director of Shaanxi Academy of Social Sciences have noticed a strange phenomenon. For many years, people’s incomes have not been related to their talent or their contributions to society; rather, their salaries are determined by where they work. Therefore, it is crucial to acquire the right social identity and be in the right industry. For instance, people could secure a high income, generous benefits, and a respectable social status if they managed to land a job in one of the monopoly industries, such as electric power, telecommunications, petroleum, banking or tobacco. Alternatively, they could also ‘win’ their good fortune working as civil servants or government institution employees.”

“According to statistics published by China’s Ministry of Human Resources and Social Security, the average salary Sin the electric power, telecommunication, banking, insurance, and tobacco industries is two to three times higher than that in other industries. Counting non-monetary income and other fringe benefits, the actual income gap is probably even wider. At the end of 2008, retired government employees’ pensions were 2.1 times higher than those of private enterprise retirees; the pensions for retirees from state owned institutions were 1.8 times higher than those of private enterprise retirees.”

“In recent years, many college graduates have flocked to apply for government jobs. It is not uncommon to see a thousand candidates applying for one civil servant opening. At the same time, the high salary for monopoly industries is under constant scrutiny.”

Part II – Colorful Income Categories

“‘Gray Income’ and ‘Black Income’ have created a huge amount of ‘hidden income’ in China, making it impossible to determine China’s overall social wealth. In a 2007 report, Wang Xiaolu, deputy director of the National Economic Research Institute of the China Reform Foundation, estimated that at least 4 trillion yuan of annual income fell into the black hole of “hidden income.” Some experts believe that, at present, normal salary income, or “white income,” makes up only one third of the actual gross income in China. A majority of income is undocumented and therefore nontaxable.”

“Due to the complexity of the income distribution channels and the lack of a payroll bookkeeping system, Chinese citizens make money in many different ways. Recently, the reporter interviewed a large number of experts, low level officials, and average citizens in 15 provinces. Most people agreed with categorizing people’s income using five colors: White, Black, Gray, Bloody, and Golden.”

White Income

“White Income refers to money made through documented payroll sources. The income is clean, clear, auditable and predictable. Su Hainan, director of the Wage Research Institute under the Ministry of Human Resources and Social Security (MHRSS), believes that, ‘White Income’ should be the mainstream income form in China. It is necessary to establish a wage growth mechanism and a payroll structure, to consolidate social security, and to increase pensions and other transferable income. (The government) should promote White Income as the dominant income source, demonstrate social justice, and enhance stability and harmony in society.”

Black Income

“Black Income includes the illegal income of corrupt officials, and it also refers to gain derived from smuggling, drug trafficking, theft, robbery, kidnapping, and other criminal activities. According to Tang Jun, secretary general of the Social Policy Research Center under the Chinese Academy of Social Sciences, and other experts, Black Income has diverted a huge sum of public funds into the wallets of some officials and lawbreakers. (The government) should resolutely crack down on Black Income.”

Bloody Income

“Bloody Income is the money made in the course of violating human dignity, and by sacrificing human life or health. Incidents such as the Shanxi brick kilns (child laborers), and slave laborers in the Hulan District of Harbin City are examples of Bloody Income profiteering. These activities violate basic human dignity. They sink below the bottom line of social decency, and they damage China’s image. Therefore, they must be outlawed.”

Golden Income

“With the economic development in recent years, Golden Income has become increasingly more important. This mainly refers to the profits from capital investment, a kind of asset appreciation income. Many people have benefited from capital gains in stock and in real estate. As a result, their personal wealth has grown exponentially. Some experts believe that Golden Income should be encouraged, but should be controlled through regulations and guidance, so that profits can increase rationally, and its speculative nature can be minimized. At the same time, corresponding tax laws and other policies should be established to regulate Golden Income, and to avoid the ‘Matthew Effect’ that widens the income gap.”

Gray Income

“There is no clear definition in academia for ‘Gray Income.’ Some scholars define Gray Income as money from unknown sources that are undocumented and non taxable; it is a hidden personal income. Others believe that income is either White or Black, and that there is no real Gray Income. No matter how innocent it sounds, the nature is indeed Black Income made by trading power for money.”

“At present, Gray Income has penetrated into all branches of society. It includes kickbacks, commissions, labor fees, lecture fees, royalties, cash gifts, and so on.”

“According to Professor Chang Xiuze from the Macro Economic Research Institute of the National Development and Reform Commission (NDRC), ‘Gray Income can be classified into three categories: The first type is Normal Gray Income, or legal income obtained by inappropriate means. The second type is called Black Gray Income, such as kickbacks, holiday gifts, using public funds for private gain, and anniversary presents; these are creative bribes. The third is Light Gray Income, or legitimate but undocumented and untaxed income, which should have been placed in the White Income category.’”

High income People Make a Large Amount of “Hidden Income”

“Wang Xiaolu, deputy director of the National Economic Research Institute of the China Reform Foundation, is an expert on Gray Income. A few years ago, he surveyed more than 2,000 recipients of all levels of income in dozens of cities and counties, focusing on family income and expense patterns. The survey revealed that a number of high-income families made a huge amount of ‘hidden income.’ The survey estimated that the (annual) ‘hidden income’ was as high as 4.8 trillion yuan (US$649 billion). The top 10% of the wealthiest families in urban areas made the majority of the undocumented money. Their ‘hidden income’ accounts for three-quarters of the total hidden income for the entire population.”

“Another major cause for the widening income gap, according to some experts, is government corruption. Taking advantage of existing loopholes in the system, (corrupt officials) make huge amounts of illegal Gray Income.”

“Meanwhile, numerous corruption cases reveal that some officials have embezzled astronomical amounts of social wealth. According to statistics from the Chinese Supreme People’s Procuratorate, in 2009 alone, 18,191 major corruption and bribery cases were investigated: 2,670 senior officials at the county level or above were involved; 204 were at the bureau chief level; and eight were provincial governor or cabinet minister level leaders. Chen Tonghai, the former Chairman of Sinopec, obtained nearly 200 million yuan (US$28 million) through graft, of which 160 million yuan (US$22 million) was from one instance of bribery, setting the record for a single bribe amount since the founding of the People’s Republic.”

“Experts believe that corruption impacts income distribution in three main areas:

First, corruption disrupts distribution. Funds earmarked for low-income groups end up in the hands of those in power, aggravating the unfairness of distribution. Second, corruption makes real personal income uncountable, defeating the purpose of the tax collection structure. Third, members of vested interest groups are capable of, and will do everything to sabotage income distribution reform. They are the biggest roadblocks to reform.”

The Distribution System at the “Crossroads”

“ ‘Although society’s tolerance of the wealth gap has increased, if (China) fails to curb the trend toward economic disparity and unfair wages, the consequence could be disastrous,’ said Yang Yiyong, director of the Institute for Social Development under the NDRC. According to Yang Yiyong, last year (2009), China’s GDP per capita was nearly $3,700 USD. (China’s) economic and social reform has entered a critical stage. Based on Latin America’s experiences, at the current stage, reform is critical to preventing economic stagnation, the widening income gap, and social unrest.”

“Su Hanan of MHRSS indicated that a flawed distribution system is directly responsible for the troubles in unfair compensation. In Primary Distribution, clear and proper proportions for the government, businesses and individuals are nonexistent; wage income is disproportionably low; and systems to encourage normal wage growth do not exist. In Secondary Distribution, (the government) has not set up clear policies to appropriate funds for social welfare and other expenditures. Therefore, it is difficult to ensure fair and reasonable Secondary Distribution. China’s Third Distribution is small; the charitable donation system leaves a lot to be desired, and its social effect is limited.”

“The Primary Distribution is irrational, intensifying the ‘strong capital, but weak labor’ phenomenon. The initial distribution is heavily ‘pro-capital,’ and the workers’ compensation is too low. Wage increases fall far behind company profit growth. Su Hanan said that, in contrast, in developed countries, wages normally account for 50% of business operating costs, while in our country (China), it’s less than 10%.”

“In Secondary Distribution, due to the immature social welfare system, a ‘reversed regulation’ (welfare money flows from the poor to the rich) phenomenon has occurred. According to data released by the All China Federation of Trade Unions, among all employees in urban areas, only 62% have a pension plan, and only 60% have medical insurance; for migrant workers, these numbers are even lower.”

“Some experts believe that, to keep the wealth gap from crossing into the danger zone, (the government) should urgently revamp the income distribution policies. It must tackle the root causes using a comprehensive approach, solicit cooperation from all parties, consider direct and indirect factors, and develop a systematic reform program.”

[1] Report compiled by the Xinhua Research Team