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As Westerners we generally look at China as the powerhouse of the East- we picture cities expanding at an unstoppable rate, the ubiquitous ‘Made in China’ label, a booming economy that had the resources to bail out our banks with billions to spare. What we tend to overlook however are the numbers that do not fit into this image- the 203 million that live on less than $US 1 per day, or the 593 million that survive on less than $2. The reality is that China is a country of two halves, and one wonders whether these will ever truly be reconciled. Think of China’s wealth gap as a case of Usain Bolt in an egg and spoon race- a tiny proportion of the population powers ahead whilst the rest are left trailing behind, unable to catch up. Per capita income in China remains low at around $4,200. This figure alone shows the extent of income inequality when we consider the massively high and shockingly low income figures that combine to make an average annual income of just under 27,000 RMB. In 2010 it was estimated that the incomes of the top 10% of the population are between and 23 and 65 times higher than those of the bottom 10%. It is of course the huge hidden economy that creates this uncertainty. In China corruption is rife, and some experts estimate that around $US 7 billion in income tax is evaded each year.

Is it really that important for the government to rectify the wealth distribution gap, and do they have the tools to do so? Let’s look at the effects. Reducing the income gap by raising the incomes of the poor would increase spending and consumption. Considering that economic growth has been a key aim for China over the last few decades, surely the development from an investment dependent economy to a consumption driven one would be welcomed. Not only is it a more sustainable form of growth, but reliance on external trading partners would be reduced- a clear benefit when we consider the state of the Eurozone and US at the moment.

The real difficulty arises when we consider how easy it would be for the government to actually close the divide. Arguably a better developed social security network would do wonders in this area. More government contribution to healthcare, employment, housing and food safety would help establish a solid social base and eliminate absolute poverty in the country. The creation of equity and efficiency in order to create a harmonious society would certainly go a long way to assist the government in its maintenance of order.

A key area of public dissatisfaction is monopolistic industries due to their creation of unreasonably high incomes, notably in areas such as tobacco, finance and oil. So, how can we deal with these monopoly industries? Cutting profit margins would certainly see a more reasonable wage distribution, but close links with government and business may make this difficult. On the other end, raising wages of workers in traditional sectors such a manufacturing would bring up the level of minimum income. Further difficulties arise here. China is traditionally seen as the go-to cheap manufacturing area for Western companies, however over the last decade world trade and markets have been rapidly expanding and become more accessible. Detrimentally to China’s manufacturing industries, this raises the level of competition from alternative offshore locations such as India, Thailand and Indonesia. Faced with the prospect of losing significant levels of business to these areas, China’s workers are forced to compete on price and sacrifice any chance of reducing the income gap.

Let’s consider those countries in which the income inequality gap is relatively small- the top three being Sweden, Hungary and Norway respectively. A key common factor in these cases is a high level of taxes which helps to fund and maintain a comprehensive welfare state. This factor in itself would indicate that tax reforms are a necessary action in China. I would think however that tax reform is difficult in a system where tax evasion is rife. The relationships that helped to widen the income gap in the first place are the very ones that will prevent it from closing. In order to reduce the wealth divide we would need to see higher contributions at the top end of the scale, and more exemptions at the bottom end. The chances of this being effectively put into place are very slim when we consider the dominance of insider information and ‘helpful’ bureaucracy that is all too common in the upper echelons of Chinese government.

In the March 2012 National People’s Congress meeting, Wen Jibao pledged to curb inflation and raise the incomes of those who have been left behind by the growth. It seems however that the upcoming change in China’s leadership have left the current authorities unwilling to commit to any concrete policies, choosing instead to leave it in the hands of the successors. This is an error- simply pushing back the problem will only see the income gap deepening, whilst it is becoming increasingly likely that we will not see definitive action until the next round of five year plans (2016-2021.) By then the situation could well have become irretrievable.

Outdated policies such as the Hukou (housing registration system) which limits the numbers of rural dwellers able to relocate to urban areas without forgoing education and healthcare benefits have made it that much harder for the poor Chinese to pull themselves out of poverty. One wonders if the continuation of this system is an indication that the government is in fact reluctant to instigate change, and instead much more focused on improving the already successful areas of the economy whilst sweeping the not so desirable aspects of the country under the rug. Population mobility is a key factor in reducing the income gap by relocating workers to the areas where their skills are most needed, and the government is quite simply not allowing this to happen.

A total abolishment of the scheme would be impossible- cities would be unable to cope with the influx of rural workers whilst the government simply does not have the funds to be able to pay for housing, education and healthcare for everyone. Despite this, a relaxing of the system would be a major signpost on the path to a more modern, open and equal society.

Social unrest and rebellion against the country’s public ownership system are what the government can expect to experience if they continue to sideline the poor in this way. The country’s Gini coefficient of 0.47 is indicative of this unrest- any value over 0.4 is seen as socially destabilising. On a more extreme note, if the system was to continue in this way we could start to see an increasing nostalgia towards the Mao years. The intent of the Cultural Revolution was to overturn a system that prioritised the rich over the poor, yet nearly 40 years later all that remains of the effects is an emergence of a new economic bourgeoisie. The extremity of the Mao effect makes it unlikely that we would see a return to revolt on such a scale, however one must not discard the underlying causes behind the revolution, that is the belief of the masses that the government and bourgeoisie classes were becoming too remote from the people.

More than most, China’s unusual and significant social control policies also contribute to the wealth gap. I am talking of course about the one-child policy. Gender and age imbalance resulting from this will contribute more to social instability than social equality. 114 males are now born to every 100 females, whilst those born in the 34 years since the policy began face the task of caring for a rapidly aging population. There were 6 working adults for every 1 retired at the turn of the century, and now barely 2 working adults face the burden for each pensioner. This is surely a time bomb just waiting to go off.

China would have been well advised to look to Japan for motivation- similarities between China’s current state and that of Japan before its bubble burst in the 1980s are worryingly similar. The pressure now is yet higher due to the economics reliance on China by the rest of the world. Export led growth, extraordinarily high current account surplus and a huge amount of excess capacity are common factors in the two cases. Furthermore, the rapid rise of house prices in Beijing and Shanghai are looking more and more akin to those experienced in the West just before the housing bubble burst. It is true in this case however that this trend is not being seen over the entire country, being instead concentrated in very built up urban areas. Furthermore, homeowners in China are those who can already afford as opposed to those undertaking massive loans in order to raise the capital. One quarter of Chinese buyers pay cash, whilst Japanese buyers at the same stage were taking out 100 years mortgages to cover purchase. In essence, China’s housing boom is being funded by savings, not by bank lending. The fact remains that although China may not be experiencing a credit-fuelled bubble, housing prices remain out of reach to a majority of its citizens.

When looking to the future of China I see only an image as hazy as the pollution that continues to engulf the city. Communism failed to solve it’s problems. Capitalism failed to solve it’s problems. So what will? For one person to be made rich, someone must be made poor, so ultimately the quest to completely eradicate poverty is a doomed exercise, but unquestionably significantly reducing the gap between rich and poor is a goal which China’s authorities would be well advised to pursue.

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