China’s Social Inequality a Cause for Concern?

 

China’s social inequality increased significantly since its “reform and opening up” process in 1979. In 1980, China’s Gini coefficient (a measure of inequality) stood at 0.3, according to People’s Daily; in 2012, it was at 0.49. 

The Gini coefficient measures inequality on a scale of 0 (perfectly equal) to 1 (perfectly unequal); any country with a Gini coefficient over 0.5 is considered highly unequal. A coefficient of 0.4 is generally considered to be a warning level. For comparison, the most recent World Bank estimates for the Gini coefficients of the world’s other top economies — the United States, Japan, and Germany — were 0.41, 0.32, and 0.3, respectively.

A report from one of China’s Peking University found that wealth and income inequality in the country is getting steadily worse. According to the report, one-third of the country’s wealth is owned by the top 1 percent of households, while the bottom 25 percent account for only 1 percent of wealth.

According to Thomas Piketty (Prof. of Economics) and Li Yang of the Paris School of Economics (PSE), the share of national income earned by the top 10 per cent of the population has increased from 27 per cent in 1978 to 41 per cent in 2015, while the share earned by the bottom 50 per cent has dropped from 27 per cent to 15 per cent. The bottom 50 per cent of the population used to have about the same income share as the top 10 per cent, while their income share is now about 2.7 times lower. Over the same period, the share of income going to the middle 40 per cent has been roughly stable. (See Figure below.)

Income inequality in China, 1978-2015: corrected estimates

Note: Distribution of pretax national income (before taxes and transfers, except pensions and unempl. insurance) among adults.
Corrected estimates combine survey, fiscal, wealth and national accounts data. Raw estimates rely only on self-reported survey data. Equal-split-adults series (income of married couples divided by two). Pre-2006 series assume that the tax/survey upgrade factor is the same as the one observed on average over the 2006-2010 period when national-level tax data exist.

 

According to PSE, the level of inequality in China in the late 1970s used to be less than the European average – closer to those observed in the most egalitarian Nordic countries – but they are now approaching a level that is almost comparable with the USA. In 2015 the bottom 50 per cent in China earned approximately 15 per cent of total national income versus 12 per cent in the USA and 22 per cent in France; while the top 1 per cent earned about 14 per cent of national income, versus 20 per cent in the USA and 10 per cent in France. (See Figures below.)

Bottom 50% vs top 1% income share: China vs US

Note: Distribution of pretax national income (before taxes and transfers, except pensions and unemployment insurance) among adults.
Corrected estimates (combining survey, fiscal, wealth and national accounts data). Equal-split-adults series (income of married couples divided by two).Pre-2006 series assume that the tax/survey upgrade factor is the same as the one observed on average over the 2006- 2010 period when national-level tax data exist.

 

Bottom 50% vs top 1% income share: China vs France

Notes: Distribution of pretax national income (before taxes and transfers, except pensions and unemployment insurance) among adults.
Corrected estimates (combining survey, fiscal, wealth and national accounts data). Equal-split-adults series (income of married couples divided by two). Pre-2006 series assume that the tax/survey upgrade factor is the same as the one observed on average over the 2006- 2010 period when national-level tax data exist.

Comparing the average annual growth rate of real per adult pre-tax national income for different income groups in China, U.S. and France from 1978-2015, the top 1 per cent of the income distribution experienced a growth rate of 8.6 per cent in China, 3.0 per cent in the USA, and 1.4 per cent in France. However, the average annual growth rates for the bottom 50 per cent in China and the US are significantly lower at 4.5 per cent and 0 per cent respectively, while the same figure was 0.9 per cent in France. For the time being, China’s development model appears to be more egalitarian than that of the United States, but less than that of European countries.

For China’s government, social inequality is worrying because of the potential threat it poses to social stability – particularly in a country whose government remains nominally communist. A survey by People’s Daily before the National People’s Congress in 2015 listed wealth inequality as the top issue China’s people wanted their government to tackle. Meanwhile, treating the symptoms of wealth inequality – ensuring equal access to education as well as providing universal health insurances and pensions for the elderly – dominated Chinese netizens’ wishlist. That concern of social stability is applicable in Malaysia, India or other parts of the world when Gini coefficient is above 0.4.

 

References:

1. Report: China’s 1 percent owns 1/3 of wealth, Shannon Tiezzi, The Diplomat, Jan 15, 2016

2. Income inequality is growing fast in China and making it look more like the US, https://blogs.lse.ac.uk, April 1, 2019