Inclusive Growth?–China Struggles to Reconcile Rising Wealth Disparities
DEVELOPMENTS
Over the last three decades, China’s economic development has been nothing short of astounding. Since the government began its economic “opening and reform” in 1978, more than 400 million Chinese have been lifted out of poverty. China became the global leader in exports and home of the largest automobile market in the world in 2010, and some economists estimate that, within the next decade, China will surpass the United States to become the world’s largest economy. Although this tremendous growth has been central to the Chinese Communist Party’s success, it has also introduced the greatest threat to the Party’s legitimacy.
Recently released reports show that the wealth generated from this growth has created a disturbingly large income gap. The number of high net worth individuals in China has more than doubled in the last three years, with their consumption fueling the world’s fastest growing market for luxury goods. At the same time, inflation and property prices in major metropolitan areas are ballooning in disconcerting fashion, affecting the ability of many Chinese to afford basic necessities. Reconciling this disparity in wealth distribution is one of the most pressing tasks for the Chinese leadership, as outlined in its recently ratified 12th Five-Year Plan, a crucial step in achieving the current leadership’s goal of ensuring a stable transition from an industrial-led economy to one driven by domestic consumption.
BACKGROUND
Food and oil prices are soaring across world markets, and China, despite significant government price controls, has not been immune. The Ministry of Finance announced a 5.4 percent increase in the consumer price index—the sharpest increase in nearly three years. In an effort to combat inflation, China’s central bank over the last six months has tightened restrictions on bank lending and raised interest rates on loans and deposits. Still, inflation has squeezed the pocketbooks of many Chinese and is resulting in increasing signs of disaffection. In Shanghai, over 2,000 truckers blocked ports in late April to demand higher incomes that would keep up with rising diesel costs and new port fees. Some sources claimed that local police responded to the strike violently.
Skyrocketing housing prices compound inflationary pressure for many Chinese. Home ownership has become increasingly difficult in major Chinese cities for all but the very wealthy. Housing prices nationwide have gone up over 140 percent since 2007. The average residence in Beijing is reported to be more than 20,000 RMB per square meter (although some estimates for the most expensive parts of Beijing are as high as 40,000 RMB), or about $290 per square foot (this is higher than the average housing price in Los Angeles.) Among the causes of the bubble are rapid urbanization, changing attitudes towards home ownership (including the notion among a younger generation of Chinese that home ownership is a prerequisite to marriage), and a lack of other investment channels for most Chinese.
Both local and central government officials are taking steps to address this housing bubble. In March, the National People’s Congress approved China’s 12th Five-Year Plan, which included a commitment to build 36 million affordable homes over the next five years. Additionally, numerous administrative measures have been announced both centrally and locally, including restrictions on who can buy a house, the number of units one can own, and bank lending for the real estate market.
Some experts argue, however, that such efforts are merely reactive and thus insufficient, as they don’t effectively address the underlying structural imbalances in the Chinese economy. A recent paper published by the University of Nottingham’s China Policy Institute contends that the Chinese government should try to “create more investment channels, to promote a fairer and better free-market system, to shift its economic structure, which will depend less on investment and more on effective domestic consumption.”
At the same time that many throughout China are feeling the pressures of inflation and soaring housing prices, recent reports indicate that a class of super-rich Chinese is growing faster than ever. One McKinsey & Company report released last month projected that China’s luxury consumption will grow 18 percent annually over the next 5 years, with China overtaking Japan in 2015 as the world’s largest luxury goods market. In addition, in late April, Bain & Company released the results of a study that found that the number of Chinese high net worth individuals (HNWIs) is projected to rise to 585,000 in 2011, nearly twice as many as in 2008. HNWIs are defined in the report as individuals with more than 10 million RMB in individual investable assets, or approximately $1.5 million. Further, the study found that the fastest growth was among HNWIs with more than 100 million RMB in assets, or over $15 million. In addition, the Bain study found a significant shift in the asset allocation of Chinese HNWI, with increases from 2009 in assets placed in alternative investments, stocks and equities, and wealth management products, and a significant decrease in assets placed in property. This, of course, stands in marked contrast to the asset allocation of less wealthy Chinese for whom property remains their most significant investment.
ANALYSIS
If the Chinese leadership wants, as it has declared, to see China make the transition to a more sophisticated less industrial-driven economy, broader structural consumption must take hold. In order to do so, those who fall outside the realm of HNWIs must be willing to consume more. For this to happen, these Chinese must have the opportunity to accrue more wealth and worry less about saving the majority of their income for investment in housing, schooling, and health care.
Some recent developments suggest positive trends in this direction. Wage increases signal that a broader segment of Chinese households might start to enjoy more of the benefits of economic growth. Further, numerous commitments at the most recent meeting of the National People’s Congress (NPC) and within China’s 12th Five-Year Plan indicate a focus among China’s leaders to expanding the social safety net and diversifying wealth. As testament to this, one of the slogans endorsed by the NPC and expected to define the 12th Five-Year Plan period translates loosely to mean “inclusive growth.”
The implications of increased Chinese consumption go well beyond China’s borders. As noted in a recent New York Times piece, an expanded class of Chinese consumers could serve as an eventual engine for the global economy and potentially benefit thousands of American jobs (as well as jobs within other developed nations.) For this reason, the encouragement of Chinese consumption served as one of the subtexts of the recent G-20 meeting in Seoul.
In order for China to become the country it aspires to be in the 21st century, its leadership must take continued steps to diversify wealth among its citizens. Policies must be implemented that, to quote President John F. Kennedy, “raise all boats,” not just those of the already wealthy. Without such policies, China will struggle to achieve some of its most significant goals, such as increased domestic innovation and more balanced production capacity. It may also fail to remedy some of its most persistent problems like income disparity and social instability. Without policies to close the income gap, China will never develop a broad middle class and will instead follow the trajectory of so many developing countries, in which wealth pools in the handful of a few.
—
Will Leahy is a graduate of Princeton University and the University of Michigan Law School. Prior to law school he served as Manager, China Policy at the U.S. Chamber of Commerce as well as Senior Research Associate at the Congressional Executive Commission on China. In addition, he has been a frequent contributor to Business China, a publication of the Economist Intelligence Unit
