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Resharing the Pie

As growth slows, China’s government seeks to reform income distribution to prevent consumption from shrinking and ease social tensions

By Xie Ying , Wang Xiaoxia Updated Dec.1

Chen Zhirong, a 55-year-old woman living in an impoverished village in Guangning County, Guangdong Province, was lifted out of poverty after the government’s povertyalleviation team helped her with a passion fruit tree orchard, October 2020

For the first time in its history, China’s Central Finance and Economic Affairs Commission (FEAC) met to discuss how to promote “common prosperity” on August 17.  

Initiated by former leader Deng Xiaoping, the chief designer of China’s reform and opening-up, common prosperity is a defining principle of socialism with Chinese characteristics. Deng advocated hard work as a path to wealth and encouraged the rich to realize common prosperity by helping others.  

At the August meeting, the FEAC defined common prosperity as neither equalitarian nor for a minority, but for all people.  

Experts said the meeting is in response to China’s widening income gap following 40 years of high economic growth. In a 2021 study on China’s income distribution, economist Ren Zeping said that most global economies are seeing their shares of labor income drop and those of capital income rise. Data from the World’s Inequality Database showed that the incomes of the world’s richest 1 percent rose from 16.9 percent in 1981 to 19.3 percent in 2020.  

China’s income gap seemed more at risk of widening as economic growth slowed without forming an “olive-shaped” society, or a distribution where the middle class makes up the largest part of the population. 

The FEAC meeting sought to “expand the middle-income population, increase the income of low-income populations, properly adjust the income of high-income groups, and crack down on illegal incomes.” Besides improving people’s livelihoods and increasing social mobility, officials initiated China’s “third (income) distribution” policy, which aims to redistribute social resources by encouraging wealthy enterprises and individuals to support charitable projects.  

Officials emphasized the measure is not “robbing the rich to help the poor,” but encouraging the rich to take a lead in promoting common prosperity.  

“China’s common prosperity does not mean being equally rich at the same time. It still allows for a reasonable income gap and will be implemented in stages,” Han Wenxiu, deputy office director of the FEAC, said at a press conference on August 26 in Beijing.  

Widening Income Gap 
According to Li Shi, director of the Institute of Sharing and Development at Zhejiang University, China’s income gap increased during the first three decades of reform and opening-up. “Driven by an ‘efficiency-first’ strategy, the income gap increased between urban and rural areas, population groups in rural and urban areas, and industries,” he told NewsChina. “The income gap was somewhat curbed over the last 10 years thanks to the government’s array of policies to support rural revitalization,” he said.  

Data from China’s National Bureau of Statistics (NBS) shows that China’s Gini coefficient, which measures income distribution, was 0.465 in 2019, above the 0.4 warning level for a “large income gap.” China’s Gini coefficient has remained above 0.4 since 2003, the data shows. 
A Gini coefficient of 0.2 or less is considered “perfect income equality” and 0.3-0.4 “adequate inequality.”  

According to current data from the World Bank, countries in Africa and South America, such as Zimbabwe and Brazil, are above 0.5, while most North European countries and some East European countries are below 0.3. Most Asian countries have a Gini coefficient below 0.4.  

Although World Bank data showed China dropped below 0.4 in 2016 from 0.437 in 2010, it remained higher than many developed countries like the UK, France, Germany, Japan and South Korea.  

The NBS’s 2019 statistics, which divide Chinese citizens into five groups based on annual disposable incomes, showed that the top 20 percent holds over 10 times the wealth of the bottom 20 percent and three times that of the middle class. The same year, the disposable income of urban residents was 2.64 times that of those in rural areas, while disposable income in China’s eastern regions was 1.47 times those in its northwest, 1.39 times of its west and 1.37 times of central areas. Among the country’s 31 provinces and multiplicities, the average disposable income in Shanghai, China’s richest city, was 3.63 times that of the poorest province, Gansu.  

Urban workers in telecom and IT services earned 2.26 times of those in rural industries such as agriculture, forestry and fishery.  

Li Shi’s study showed that China’s property gap has widened rapidly since 2000, and exceeded the income gap in 2013.  

His data is supported by Credit Suisse AG’s Global Wealth Report 2021 released in June, which said that China’s wealth Gini coefficient exceeded 0.7 in 2020. A wealth Gini coefficient above 0.8 shows a “large wealth gap.” Credit Suisse AG revealed that China’s wealth Gini coefficient rose to 0.711 in 2015 from 0.599 in 2000 and then dropped to 0.697 in 2019. Influenced by the Covid-19 pandemic where recovery, according to analysts, has been easier for the rich, China’s wealth Gini coefficient rose to 0.704 in 2020.  

At a press conference in May 2020, Chinese Premier Li Keqiang said 600 million Chinese still earned monthly wages below 1,000 yuan (US$143), though the country’s average per capita annual income exceeded 30,000 yuan (US$4,285). According to the World Inequality Database, China’s top 1 percent held 15.8 percent of its total wealth in 1995. The figure rose to 31.1 percent in 2009 and fell to 27.3 percent in 2013. In 2020, it hit 30.6 percent.  

Li Meng, a villager in Danfeng County, Shaanxi Province, sells chickens she raises via livestreaming, July 20, 2020

Economic Slowdown 
However, according to Li Shi, China’s income gap has not yet created a tremendous disparity between the rich and poor because lower incomes are also growing, albeit at a slower rate.  

Li attributed this to China’s high economic development and low unemployment rate over the past four decades. But Li warned that as economic growth slows, the government should address the risks of increased income gaps.  

Official data showed that China’s GDP growth has been decreasing since 2010, from 10.6 percent to 6.1 percent in 2019. In recent years, the Chinese government emphasized “stable” economic growth through improved economic structure and set the GDP growth target at around 6 percent. Chen Changsheng, director of macroeconomic research at the Development Research Center of the State Council, predicted that China’s GDP growth would gradually drop from 5.5 percent in 2022 to 4.5 percent by 2028, without factoring in the pandemic’s impact.  

“Sharing economic growth depends on how big the pie is and how good institutions are at sharing it. If distribution remains unchanged, a slowdown means decreased sharing. Such trends have emerged in China,” Cai Fang, former deputy director of the Chinese Academy of Social Sciences, wrote for Comparative Studies magazine in 2020.  

According to Cai, the ratio for average income of China’s top 20 percent to bottom 20 percent in urban areas fell from 5.77 in 2008 to 5 in 2012, and then rose to 5.9 in 2018. In rural areas, the ratio dropped to 7.41 in 2013 from its height of 8.39 in 2011, and then shot to 9.29 in 2018.  

This suggests that when economic growth slows, it becomes more difficult to increase incomes among poorer groups. Li Shi with Zhejiang University warned that if the government cannot play an effective role in fair distribution, the income gap will widen, which would curb consumption and exacerbate social tensions.  

That is why many analysts have warned of China falling into the middle income trap, which commonly occurs when a country gets stuck at a certain income level after losing a competitive edge (particularly in manufacturing) and falls behind developed economies in high added-value markets.  

“The middle income trap actually means that a government has to consider how to continue to make the pie bigger while maintaining sufficient social mobility to better share it... It’s a phase where the government must pay a lot of attention to redistribution policies,” Cai wrote in the Comparative Studies article.  

“When the pie-making slows, dividing it becomes more important,” he wrote. “Yet, some causes of the economic slowdown have affected primary income distribution and curbed social mobility. If redistribution policies do not work well, the income gap will grow easily,” the article read.  

A riverside restaurant terrace on the Bund in Shanghai is busy at night

Measures and Difficulties 
During the four decades of reform and opening-up, China established a primary distribution institution based on a competitive market economy without equalitarianism. However, loose supervision of some industries and flaws in secondary income distribution, such as taxation, subsidies and corruption, have facilitated unreasonably high incomes.  

“In a society where distribution is very unequal, talking about equality of opportunities is meaningless,” Li Shi said.  

To realize common prosperity, Li suggested the government help the market play a more decisive role in resource distribution and reform policies that result in unfair income distribution, such as labor discrimination based on household registration (hukou), which can hold back labor migration, and different pension systems for government and enterprise employees. As for secondary distribution, Li suggested improving taxation’s role in adjusting incomes, increase financial assistance to low-income groups, and giving all people access to public services wherever they live.  

The government is taking some measures. In 2021, China’s State Administration for Market Regulation slapped substantial antimonopoly fines on China’s leading e-commerce platform Alibaba and leading food delivery platform Meituan. More recently, regulators ordered WeChat to stop blocking links to other platforms.  

In February, the Chinese government announced that absolute poverty had been eradicated nationwide and pledged to continue alleviation work. The same month, the government issued its “2021 No.1 Document,” which proposed to further promote the rural revitalization programs China started in 2017.  

Following the August FEAC meeting, Tencent announced a 50 billion yuan (US$7.1b) corporate responsibly project to promote “common prosperity.” The next month, Alibaba announced a similar donation, pledging 100 billion yuan (US$14.3b). Other major companies such as Meituan, Xiaomi and ByteDance made large donations to charitable projects.  

Commentators widely see the measures as responses to the government’s call for “third distribution.”  

However, some online have accused the government of “robbing the rich to subsidize the poor.” Officials have denied such accusations, reiterating that common prosperity will never be an equal division of wealth.  

Li Shi said authorities face three major challenges to reform the present distribution: how to maintain income growth for low-income groups at a higher rate than high-income groups, expand the middle class and effectively adjust high incomes. He also warned against potential resistance to adjustments from vested interests and monopolies.  

A property tax, which has long been pending, is a good example of this balancing act. Authorities have to prevent the tax from negatively affecting low-and middle-income groups while providing a solution that is minimally disruptive.  

In June, the central government named Zhejiang Province as a pilot area for promoting common prosperity, as this relatively rich province has taken the lead in many economic reforms in the past. But many analysts argued that policy should be tailored to regions.  

“We should conduct sufficient studies... when exploring common prosperity. We have to decide which regions should take the lead in promoting common prosperity and which measures are fundamental,” Liu Yuanchun, vice president of the Renmin University of China, said in an August interview with media outlet Economic View, a China News Service affiliate. “Regions and groups may understand common prosperity differently, so it’s very hard to reach an effective consensus,” he added.  

“We must realize that the focus of distribution reform is to eliminate unfairness, which is a tough and complicated task for the long term and should be combined with market economy reforms... We should not expect the income gap to decrease over the short term,” Li Shi told NewsChina. 

A new community for people relocated from the impoverished Jiangdang Village, Tibet Autonomous Region