Over the past several decades, China’s income gap has expanded significantly. The current inequality issue is so acute that Chinese leader Xi Jinping has explicitly emphasized the goal of “common prosperity” at a prominent meeting in August 2021 of the Central Committee for Financial and Economic Affairs, requiring an “olive-shaped distribution structure of large middle and small ends” as reported by Xinhua News Agency.
Is this distributional goal feasible? Considering various economic, social, and political factors in China, unfortunately, the answer of many analysts is not very optimistic.
1. Xi Jinping and “Common prosperity” initiative
When Xi Jinping’s likely third term as the Chinese Communist Party’s general secretary nears, the party is seemingly eager to show its empathy for the people and the complaints, said New York Times.
“Achieving common prosperity is not just an economic issue; it’s a major political matter bearing on the party’s foundation for rule,” Mr. Xi told officials in January 2021. “We cannot let an unbridgeable gulf appear between the rich and the poor.”
The “common prosperity” concept suggested by President Xi Jinping aims explicitly to expand the proportion of the middle-income class, increase the low-income group’s income, and regulate the high-income group altogether to form an olive-shaped distribution structure.
“Common prosperity is not new,” said Joyce Chang, managing director and chair of global research at JPMorgan, at a recent Center for Strategic and International Studies webinar. “It is an essential part of socialism, and it has been around since 1949, taking different iterations under different leaders.”
Chang said it began with Mao, who focused on eradicating the private and individual economy, followed by Deng Xiaoping, who opened up China globally in the 1980s to cope with poverty.
In its race for growth to sustain the rule of the communist regime, Deng Xiaoping declared that China would “let some people get rich first.” Now, Xi Jinping promises “common prosperity” to lift farmers and working families into the middle class and presses China’s businesses and entrepreneurs to share more wealth with the rest of the country.
2. Inequality in China
China belongs to the 20% most unequal countries globally, says Bloomberg. According to the annual report recently released by the World Inequality Lab, the bottom half of Chinese adults earn about 25,520 yuan (US$4,000) a year. In contrast, the top 10 percent of the population earns, on average, 14 times more at 370,210 yuan.
Credit Suisse Research Institute also estimates that China’s top 1 percent today owns roughly 31 percent of the country’s wealth, up from 21 percent in 2000.
As recently reported by Asia Financial, today, 1.1 billion people in China are still considered low income, with an estimated 600 million living on less than 1000 yuan ($156) per month. According to the World Bank report, these data are in sharp contradiction to China’s GDP per capita in 2020 at over $10,400 per capita.
“China’s income gap has expanded since the 1980s to reach a peak in 2008, when the Gini coefficient reached around 0.5. After that, it declined for a few years slowly, but has rebounded since 2015. Now it’s at a high level of around 0.47, according to an official estimate. The actual income gap could be larger, because the estimate is based on household surveys, which tend to under-represent high-income respondents”, said Bloomberg.
It is worth further clarification that surveys in China can hardly capture information on the underground income of individuals and households, especially for wealthy corrupted Party officials who transfer their assets abroad.
“By some estimates, between US$1 and US$4 trillion in untraced assets have left the country since 2000,” notes the International Consortium of Investigative Journalists (ICIJ) in their 2014 report. Under Chinese law, officials are not obliged to declare all their belongings publicly; thus, having offshore accounts and possessing wealth does not necessarily mean going against the law.
“Inequality is quite serious. The inequality within cities and within rural areas has also been expanding. Now urban residents roughly earn 2.5 times that of rural residents,” Bloomberg added.
The World Bank Group has recently warned that the COVID-19 pandemic has broadened the rich-poor gap, particularly in emerging markets and developing economies like China. In the case of China, the wealth gap has expanded due to the ownership of flats, which is the biggest source of household wealth and debt, claims SCMP.
3. Why such inequality?
“A generation ago, the offspring of the ruling elite took up positions in the government or military; today, they go into business. The social ramifications of their self-dealing are particularly evident in real estate, where peasants regularly earn less than 5 percent of the value of their land while developers pocket 60 percent, with the remainder going into local government coffers,’ reports Foreign Policy.
“Privatization, too, offers insiders a chance to hit it rich by gobbling up state assets on the cheap. A recent study showed that 60 percent of privatized state enterprises were sold to their managers. As a result, 30 percent of all private-firm owners are now party members.”
3.1. Elitism and corruption
The 2009 paper by Foreign Policy seems to foretell the worsening situation of wealth inequality in China today while pointing out the nature of its ruling regime:
“The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital — all vilified under Maoism.”
As a result, those who have made great fortunes in China are principally business people and CCP cadres; in many cases, they are linked either economically or by blood and marriage.
According to Dr. Wang Youqun, former supervisor of the Central Discipline Commission of the CCP, since 2013, more than 160 generals of the Chinese military have been investigated.
This figure surpasses the total number of generals who died in the CCP’s civil wars, external wars, and Cultural Revolution in the twentieth century, which indicates the great extent of corruption involving high-ranking officials of the CCP.
The severely corrupted political environment in China over the recent decades is directly linked to the so-called strategy of “ruling the army through corruption” to buy the heart of the people by Jiang Zemin – former Chairman of the CCP Central Military Commission, former General Secretary of the CCP and former President of the People’s Republic of China.
Shocked by the extent to which officials waste taxpayers’ money or use their positions for personal gain, Xi Jinping had to declare that corruption threatened the survival of the sole ruling party just a year after his inauguration.
3.2. Unbalanced development
Another major factor contributing to inequality in China is unbalanced development policy, said Li Shi, an economics professor at Zhejiang University known as “Mr. Chinese income distribution.”
The household registration system (hukou) restricts people’s movement and causes discrimination against migrant workers. Moreover, China’s general development strategy has focused on cities while neglecting villages. Public services such as education and health care are concentrated in urban areas, damaging the economy in rural regions and the income growth of rural residents, Bloomberg narrates Li’s explanations.
Additionally, wages in newly emerged industries, particularly the digital economy, grow so fast and possibly reach exceptionally high levels because of the high skills needed and their strong monopolistic characteristics. Meanwhile, wages in other industries increase slowly.
Li also acknowledges the rapid rise of income from assets contributes to rebounding inequality, as high earners often possess more assets than low-income groups. In China’s economic slowdown, the latter suffered more, widening the income gap.
4. True story of redistribution in China
To solve the gap between rich and poor, Mr. Xi Jinping proposed a “triple income distribution” measure. What is “triple income distribution,” and how feasible is it? In the program “Commentaries on the World,” Professor Zhang Tianliang, an overseas expert on Chinese affairs, has provided insightful explanations.
Professor Zhang explains that in an everyday context, the first distribution works as people earn money through labor, and they are paid based on their contribution and efficiency. Then, they pay taxes as a second distribution, giving the money of the rich to the poor. After that, based on the power of morality, wealth will be further transferred from the rich to low-income people through voluntary donation—this is the third distribution.
4.1. Second distribution in China: Take from the poor, give to the rich
To some extent, the second distribution in China seemingly works in the opposite direction to the theory. According to Professor Zhang, in nominal terms, the Chinese Business Tax or Corporate Income Tax (CIT) levied on all businesses’ profits is not high, at 25%. Still, in reality, their significant burden is not taxes but fees.
For example, if the fire safety system does not work well, the government agency will fine the company. Similarly, for Chinese farmers, most of what they pay is not agricultural tax (which is very low) but fees such as irrigation fees, road construction, family planning, plus fines. In general, government agencies often try to generate income through such channels.
If Chinese companies want to survive, they have to pay taxes and have to create relationships with many government officials through bribes. After that, additional amounts are required as a “protection fee.” Thus, the burden of fees and taxes on Chinese enterprises is heavy.
Furthermore, the Chinese Communist Party raises millions of members, and its high-ranking officials enjoy many privileges financed by taxpayers’ money.
For instance, provincial and ministerial officials of the CCP obtain free medical care annually and even have money to travel. When they travel, they may bring the whole family along; their services are almost first-class.
Therefore, increasing taxes and fees in China will probably take the money from the poor to the rich, which only widens the gap between the rich and the poor, concluded Professor Zhang.
4.2. ‘Third distribution’ in China: Forced charity
Theoretically, the third distribution is based on voluntary contributions, and the government should not interfere.
For example, in the United States, charitable contributions are made through NGOs, which are also nonprofit organizations. America has 300 million people and 1.5 million nonprofits, and these nonprofits run things that the U.S. government doesn’t.
In a normal society, the government has bounded power and only manages certain fields, including national defense, diplomacy, construction of public roads, etc. There are many other things that the government cannot manage, and in America, those things are run by the people.
For example, traditional American arts such as ballet and symphony do not seem very prosperous. But art itself needs money, then those who are interested in this traditional art, including some billionaires, will support it. The billionaires may not know what to do effectively, so they give some money to someone knowledgeable in the field. Those knowledgeable people will build a nonprofit company and can earn money to run the company through performing arts, collecting theater tickets, selling art products, and so on.
However, the amount earned is only a small part of the income, about 30-40%. This means that 60-70% of nonprofits’ money doesn’t come from selling services/products but from charitable donations. Each year, in the United States, these donations can amount to hundreds of billions of dollars. Nonprofit companies have one main advantage—the money donated to them is tax-free.
Xi Jinping wants to do a “third distribution” to achieve “common prosperity,” why wouldn’t it be possible in China? There are several reasons.
First, a nonprofit organization in China has little supervision and trust. In America, if you do charity, people will feel you are kind-hearted. But if you do charity in China, people will possibly say you are cheating.
A typical case was the Shanghai Social Security Fund in 2006. Former Secretary of the Shanghai Municipal Party Committee, Huang Ju, was a close confidante of CCP’s former leader Jiang Zemin. His wife, Mrs. Yu Huiwen, founded a charity organization called ‘Shanghai Totole.’ ‘Toto’ means wife in Chinese, so this organization gathers people like the wives of mayors, deputies to the people’s councils, etc.
If a company wants to bribe Huang Ju, they can’t find him. Those “donating” more than 10 million yuan (about $1.5 million) to Shanghai Totole can directly meet Huang Ju’s wife. In other words, many charities in China are where the money is collected.
Another reason against third distribution in China is that there is no tax exemption mechanism when doing charity.
Moreover, the so-called “donations” in China are at times mandatory, not voluntary like in the U.S. Using The New York Times’s words, “the “common prosperity” campaign has converged with a crackdown on the country’s tech giants to curb their dominance. Facing scrutiny, some of China’s biggest billionaires, like Jack Ma, have lined up to pledge billions of dollars to charity.”
Professor Zhang Tianliang further explains that Xi Jinping says the ‘third distribution’ is a wire transfer payment, enough for local officials to force companies to donate. Forced donation is not a donation but tax collection, so there is no “third distribution” like in Mr. Xi’s method. Professor Zhang says this added type of “heavy tax collection” is just robbery.
5. Common prosperity: Mission impossible
When redistribution, in general, would possibly bring more problems than solving them, as pointed above, one might particularly think of property tax as a direct way to transfer wealth from the rich to the poor since the ownership of flats has been identified as the primary source of the wealth gap.
According to Asia Financial, the Chinese government announced the rollout of five-year property tax trials in several cities. Despite having been on the table for around two decades, property tax remains controversial in China for two reasons.
First, it is broadly believed that wealthy property owners, some of whom are politically influential, have successfully impeded the establishment of new measures. Second, such a policy’s potential effect on the housing market might be too harmful.
“[Housing is] a key pillar of the Chinese economy. It contributes about 15% of GDP,” said Joyce Chang from JPMorgan. “Real estate investment alone accounts for about 25% of fixed investment. So if you think about a five-percentage-point slow-down in real estate investment then actually it takes about 0.4% off GDP growth in China.”
In addition, another barrier to creating a larger middle class as Mr. Xi headed may be the lack of investment in human capital in the country, says Asia Financial.
John L Holden, senior associate (non-resident), trustee chair in Chinese business and economics at CSIS, argues that if China becomes the “high income, high tech, high skill economy” as planned, the low-skill service sector will only need 100 million people working in it. But now, up to 500-600 million people are low-skill sector employees in China, requiring the government to “keep transferring bags of cash to low-skilled people” or make a significant investment in education.
“You have to educate this sector,” said Holden. “If you start educating people right now at [the age of] zero to three, four to six, six to 15, they’re going to be ready to enter this sector in 2035-2040.
“If you compare China, a middle-income country, to all the other middle-income countries in the world, China has the lowest level of human capital in the entire middle income [bracket]. This isn’t a problem that can be solved in ten years… I don’t think that the current government understands what common prosperity in a high-income high-tech economy really depends on.”
Although “common prosperity” sounds to be a nice and bright perspective, it is hardly feasible given the political and socio-economic context of Communist China. Communist ideology propagates equality, but the means it uses, as seen in modern Chinese history, are coercive and inhumane. Although communism promised to lift farmers and workers out of poverty, in the end, their relative situation has not changed much, and communist revolutions only brought wealth and power to members and affiliates of the totalitarian communist party.
According to traditional Chinese culture, there is no problem with income inequality itself because people are rewarded differently in this life based on their virtue and karma accumulated in past lives through their good or bad actions, and this process is absolutely fair. If someone makes a fortune in an unrighteous manner, they will be punished sooner or later by Heaven. Therefore, there should not exist any kind of violent revolution as incited by communism.
Ancient Chinese believed that as long as the ruler and the people cultivate their virtue and uplift their moral standards according to Heaven’s Law, the whole nation will be blessed with wealth and longevity. The zenith of Chinese civilization and prosperity, the Tang Dynasty, is one of the most apparent evidence for this belief.