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Rising inequality imperils China's push for 'quality' growth

Growing wealth gap also breeds public dissatisfaction toward government

China hopes to make consumption, rather than investment, the main driver of economic growth.   © Reuters

BEIJING -- Incomes in China are growing more unequal as rising asset prices have primarily benefited top earners, fueling social resentment and threatening efforts to have consumption take over the role of top economic driver from investment.

China's Gini coefficient, a measure of economic inequality, increased by 0.002 on the year to 0.467 in 2017, the National Bureau of Statistics has said. This is 0.005 more than in 2015, when the measure hit a recent low, having declined since reaching a record of 0.491 in 2008. The coefficient, which ranges between 0 and 1, is now on the rise again, representing widening inequality.

Other data confirm this trend. Disposable income of China's upper class -- the wealthiest of the five social classes the country uses to examine income -- grew 9.1% in 2017, or 0.8 percentage point more than in 2016. That among the upper-middle, middle and lower-middle classes increased 7.7%, 7.2% and 7.1%, respectively. These rates are 0.6 point to 1 point lower than a year earlier.

Lower-class disposable income advanced 7.5% -- 1.8 points more than in 2016, signifying that anti-poverty programs are having some effect.

China's real estate bubble is a major factor in the widening income disparity. Prices began inflating in 2015 after the government loosened requirements for home loans, aiming to reduce a glut of housing stock. Speculation in the market boomed as already-lofty prices in major cities soared even higher.

Many of China's wealthy have benefited from the surging real estate prices, since they own multiple properties. In China's 2017 income survey, income from assets rose 11% on the year, logging double-digit growth for the first time in three years.

Meanwhile, curbs on rural migrant workers in urban centers have restricted earnings growth at the bottom of the income pyramid. Cities including Beijing and Shanghai have worked to force these workers out in recent years, including by tearing down illegal structures where many of them reside. As a result, populations in these cities had fallen across the board by the end of last year -- the first such drop for Beijing in two decades.

Inequality generally declines when farmers move to cities and take jobs in other sectors. But the free movement of people within China remains restricted, widening income disparities, said Lou Jiwei, chairman of China's National Social Security Fund Council, in a January speech.

The broadening gap could imperil President Xi Jinping's push for structural reforms that would make consumption, rather than investment, the top driver of development. The president has pledged repeatedly to emphasize quality over quantity when it comes to economic improvement.

Yet growth in personal consumption slowed 1.4 points to 5.4% in 2017 on weaker sales of goods such as smartphones and automobiles that tend to drive spending. While consumption did account for 59% of China's economic growth last year, that tally takes into account "government consumption," such as public health insurance.

The government does not reveal the extent to which personal spending itself plays a role.

When the gulf between rich and poor expands, overall savings rates in an economy tend to increase, and consumption stagnates. A rise in incomes at the high end of the spectrum simply results in more wealth accumulating, as the wealthy already have more money than they are likely to spend. What additional spending does occur is often concentrated on luxury goods: Not coincidentally, distillery Kweichow Moutai is doing a brisk trade in high-end liquor.

What is more, widening income inequality strikes at the heart of the Chinese Communist Party's rationale in pursuing free-market reforms 40 years ago. Deng Xiaoping, China's leader at the time, faced the monumental task of rebuilding the country's economy after the destruction wrought by the Cultural Revolution. He did so by welcoming vast amounts of foreign capital, concentrated at first in coastal cities such as Shenzhen.

The premise of this liberalization was that while only some would become rich at the outset, accumulated wealth would be distributed throughout society once growth had enlarged the economy overall. Though income disparities indeed widened, double-digit economic growth brought steady standard-of-living improvements even for those at the bottom, and supported the belief that, with enough patience, anyone could share in the wealth that was flowing into the country.

These improvements have now tapered off for the middle and lower classes with the end of rapid growth. Yet the wealthy continue to gain as prices of assets such as real estate and stocks expand. The composition of top earners' wealth poses a challenge for China's redistributional machinery: Though the country has a progressive income tax in place, it has not enacted measures such as property and estate taxes that would capture asset-driven gains and use them to fulfill the promise of widespread prosperity.

The public is growing disillusioned with the notion that all will eventually become wealthy, threatening the social stability. Xi attempted to head this off early in his administration by cracking down on corruption, ousting party officials that had grown wealthy though illicit means. But unless real efforts are made to create a better system of wealth redistribution, mass resentment over growing economic inequality will continue to simmer.

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