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Xi’s challenge: addressing China’s income inequality

New leader of China’s Communist Party Xi Jinping has made a commitment to addressing income inequality in China. But without wide-ranging reforms, real change seems unlikely.

Income equality — or at least some semblance of it — is a fundamental concern for most people in the world, and it’s been a hot political topic in Australia over the past month or so. Who can forget Jenny Macklin’s now infamous declaration that she could live on Newstart?

With an increasing number of corporations looking for union “work arounds” and the possibility the Coalition will bring back WorkChoices (or something that looks like it), it’s likely the issue will continue to come up throughout the exhausting federal election campaign.

In the US the topic of income equality was raised in President Barack Obama’s State of the Union address:

Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong. Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9 an hour. This single step would raise the incomes of millions of working families.”

And then he provided that essential link:

It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets.”

Income equality is also the topic du jour in the world’s second-largest economy — China, supplier of cheap goods to the moneyed West and buyer of 30% or so of Australia’s exports.

Ten days ago the Chinese government issued a 35-point plan for better income equality. Along with fighting corruption and fresh economic reforms, it has emerged as a pet theme of the new Xi Jinping administration even before he officially takes over the “government” (in contradistinction to the Communist Party) in March.

And with good reason, too. The gaping chasm between China’s wealthy and its ordinary workers is made plain every day in the world’s most populated country. The basic facts are stark: China now has 251 billionaires, up from 15 only six years ago, according to last October’s annual Hurun Report. Yet there are also as many as 400 million people living in on less than $2 a day. That’s more people than live in the United States.

For every driver of a yellow Lamborghini — without licence plates — who hoons around Beijing, there are thousands of exhausted workers being loaded onto ancient buses in the heart of the capital and ferried back for their eight hours’ rest in a crowded barracks somewhere on the outskirts of the city, ready for another 12-hour backbreaking day on a subsistence wage.

And that’s just the workers. China’s middle classes are being squeezed too, by eye-wateringly expensive property in the big cities where careers and fortunes are to be found. A modest 90-square-metre, two-bedroom apartment near the city’s sixth ring road — that’s past the airport and a 90-minute commute, at least, into the main CBD — will set you back 1 million renminbi ($155,464). Many middle-class couples need support from their parents to help pay their mortgages. The repayments on such an apartment are about the same as the average Beijing wage of about 10,000 RMB ($1555) per month. The same apartment inside the third ring road close to the CBD is 3.5 million renminbi ($544,125).

Then there is education. Fees even for public schools are increasing, and if parents want to send their children to a good school outside their residency zone, or hukou, they will get stung by one-off fees starting at 30,000 renmimbi (three months’ wages, about $4,663) for primary school and soaring as high as 300,000 RMB ($46,638) for the best middle schools.

Food inflation is still at running at annual double digits in China, making something of a mockery out of the official inflation figure of about 2%. Everywhere you turn in China, people complain about rising prices.

It’s all well and good to put more money in people’s pockets, but will it flow through the economy or be gobbled up by unseen taxes (corruption) or inflation?”

The chattering classes are increasingly restless, as evident by the popularity of government-bashing on the wildly popular Twitter-like internet bulletin board Weibo. Chinese people are very aware — and increasingly angry — that they are being ill-served by their governments. They may not want to overthrow it, but they certainly want more, in some cases a lot more, from the unpopular official class.

Those same officials recently released figures showing that the widely accepted Gini coefficient had “peaked” in 2008 at 0.47 — over 0.4 represents a serious problem. Yet anecdotal evidence belies this, and few believe the official numbers.

As renowned Brookings Institution China scholar Minxin Pei put it: “This piece of good news has been met with disbelief, if not ridicule, since independent analysis shows no such trend. A more recent survey conducted by a joint Chinese-American research team based on surveys of several thousand households concludes that China’s Gini coefficient is 0.61, considerably higher than the official figure [only South Africa, with a Gini coefficient of 0.63, has a higher level of income inequality than China].”

To use the more rough-and-ready taxi driver test, try this response from a Beijing cabbie: “Provided the government actually puts up taxi fares [something it has been reticent to do as it will adversely affect inflation], then sure, I think my income may double in few years. But will I be able to buy more? I doubt it.”

This is where the rubber really hits the road in the Obama test, if you like. It’s all well and good to put more money in people’s pockets, but will it flow through the economy or be gobbled up by unseen taxes (corruption) or inflation? Xi’s 35-point plan states:

There are some urgent tasks to solve regarding the distribution system, including the income gap between rural and urban residents, a lack of standards in distribution and illegal income.”

The plan aims to boost minimum wages to at least 40% of average salaries by 2015, from the current level of around 30%. It also reiterates an old target of doubling per-capita income from 2010 to 2020 and issues a vague commitment to “narrowing the wealth gap while building a more transparent and fair distribution system”.

All laudable goals, but these broad-brush figures mean little at a local level, and there are few other enumerated targets. The more fundamental problem is that the government cannot simply improve income equality without doing the hard, and politically fraught, yards of strengthening flaccid institutions, which necessitates a loosening of the grip of the Communist Party.

The government also needs to expand its tax base, but it continues to baulk at the introduction of a much-trialed property tax, which would hit the wealthy and capture some of the country’s massive grey and black economies.

Xi’s number-one target, fighting corruption, will only come through reform of the legal system and increased freedom for the media. Without more fundamental reforms that will necessarily threaten the rule of the Communist Party, China’s income disparity problem seems set to grow more pronounced.

When at the podium in the Great Hall of the People last November, Xi spoke eloquently:

Our people have great enthusiasm for life. They hope for better education, more stable jobs, more satisfactory income, more reliable social security, medical services with higher standards, more comfortable living conditions and a more beautiful environment. They wish that children will grow better, work better and live better. The people’s desire for a better life is simply the target of our endeavour.”

But his words won’t matter a hill of beans if they are not backed by deep legal reforms. Better income equality by edict just doesn’t cut it.

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