China Seeks to Strengthen the Middle-income Group

By JOHN ROSS

IN recent months China’s leadership at the top level has explicitly turned its attention to reducing China’s social inequality and in particular to increasing the percentage of the population who are on “middle incomes.” In 2014, in People’s Daily, President Xi Jinping bluntly stated this overall issue: “We want to continuously enlarge the pie, while also making sure we divide it correctly.” On May 16 this year the Central Leading Group for Financial and Economic Affairs, headed by Xi Jinping, placed the issue of expanding China’s middle-income group on its agenda. China’s top leadership has therefore started to directly address a matter which, as the facts given below demonstrate, has developed over several decades. 

Xi Jinping stressed at the Central Leading Group meeting expanding China’s middle-income group, the relationship between this and China’s goal of building a “comprehensively well-off society,” and that this expansion was a necessary requirement for maintaining China’s stability. To achieve this, it is necessary to improve China’s income distribution system, to maintain the principle that income should be decided according to work, and to strengthen human capital through focusing on the quality of education and boosting construction of a modern vocational training system.

Turning to the factual data motivating such attention, studies over the last decades in China imply a sharp increase in inequality. Earlier this year, in analyzing the consequences of this, Chang Xiuze, a prominent economist at Tsinghua University, estimated that affluent people made up 10 percent of China’s population while the number of low-income and poor people was 60 percent. The middle-income group, generally considered to earn a monthly income of between RMB 5,000 (US $750) and RMB 10,000 (US $1,500), constitutes only 30 percent of the population.

Such disparities, in addition to other wider social effects analyzed below, necessarily strongly affect the structure of the development of China’s consumer market. The comparatively small percentage of China’s population that constitute the middle-income group means that the demand for luxury goods continues – but such goods are largely produced abroad. Markets for basic goods sought by those on low incomes are sustained, but those for the middle-income layer key products (high-quality household goods, food and restaurants, leisure activities, cars, etc.) are constrained. These sectors however are key to China’s attempt to develop higher productivity companies. Therefore, this distortion of the consumer market has significantly negative consequences for China’s macro-economic policy.

This overall inequality in China is seen clearly in the Gini Coefficient, the standard international measure of inequality. It is calculated from zero to one, with zero indicating complete equality (each person/household receives the same income) and one being total inequality (all society’s income is received by one person/household). The World Bank analysis considers that a number above 0.40 represents severe inequality.

Differences exist in estimates of inequality in China, but all show levels exceeding the danger level of 0.40. A report by Peking University earlier this year calculated China’s Gini Coefficient in 2012 at 0.49, having risen from roughly 0.3 in the 1980s. This was the third highest among the world’s 25 largest countries by population.

Internationally the 2015 IMF working paper “Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+” concluded: “Income inequality [in China] – as measured by the Gini Coefficient for pre-tax market income – has exhibited an increasing trend from 0.28 in 1980 to 0.44 in 2000 and 0.52 by 2013.”

Official data show slightly less extreme figures. China’s National Bureau of Statistics stated in 2015 that the country’s Gini Coefficient had fallen slightly to 0.47 in 2014 from 0.48 in 2011. But this is still above the 0.40 level indicating extreme inequality. Therefore, there is no doubt that in previous decades income inequality in China rose to significantly excessive levels.

International comparisons show clearly that trends of rising inequality are undesirable from the point of view of economic, social and political stability as well as sustainable growth. In a growing number of key countries the issue of economic inequality has become a source of spreading concern – in particular since the 2008 international financial crisis. During this decade these effects have manifested themselves in a growing number of economic, social and political spheres internationally.

In 2011 the U.S. “Occupy Wall Street” movement was launched. It attracted worldwide attention, rapidly popularizing such catch phrases as the “one percent” (the super-rich) as compared to the “99 percent” (the vast majority of the population). Initially such movements primarily consisted of an activist layer of young American people, but these proved to prefigure major shifts in U.S. politics which were revealed on a truly mass scale in the 2016 U.S. presidential primary elections.

Mass perception of social polarization has risen sharply in the U.S. Opinion polls show that the percentage of the U.S. population defining themselves as “middle class” fell from 63 percent in 2001 to 51 percent in 2015, while in the same period the proportion defining themselves as “working or lower class” rose from 33 percent to 48 percent. In other countries, such as Britain, the idea of the “squeezed middle” acquired wide currency – the concept that middle-income layers were being reduced in size as wealth was increasingly concentrated among the super-rich, while there were growing numbers of those on inadequate incomes.

In 2013 French economist Thomas Piketty’s book Capital in the 21st Century, a nearly 1,000-page statistical analysis of growing inequality which in other circumstances might only have attracted attention in academic circles, became a global bestseller.

Clearly linked to these social trends were the 2016 U.S. presidential primary election events, which entirely escaped the control of the traditional Republican Party leadership when the Republican nomination for president was seized by rightwing populist Donald Trump. Simultaneously in the Democratic Party Bernie Sanders achieved the first mass support for a self-declared socialist candidate for U.S. president since 1920.

These tendencies indicating a rise in social and political instability have in turn stimulated research on the economic consequences of inequality. Studies on this had always existed but were mainly seen as a research activity pursued by “leftwing” thinkers. This perception has sharply changed following studies by entirely orthodox and conservative economic institutions such as the IMF – which has produced reports that reach conclusions encapsulated in self-explanatory titles such as “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” and “Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+ .”

The statistical finding of such studies by the IMF and others were clear and striking.  More equal income distribution is correlated with longer periods of economic growth, and greater inequality shortens periods of economic growth. As found in the IMF’s “Inequality and Unsustainable Growth: Two Sides of the Same Coin?”: “A 10 percentile decrease in inequality –  the sort of improvement that a number of countries have experienced during their [growth] spells – increases the expected length of a growth spell by 50 percent.” Indeed, inequality was found to be one of the strongest factors shortening periods of economic growth.

The explicit turn of focus by China’s leadership to reducing economic inequality by increasing the percentage of the population which may be characterized as “middle income” is therefore necessary and extremely timely in light of both China’s own economic needs and international studies and experience.