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To boost economy, China needs to fix wealth divide





In his speech for the opening of the 18th Communist Party Congress, China’s leader, Hu Jintao set the goal of doubling China’s 2010 GDP and per-capita income by 2020. This is the first time that China’s central government has explicitly set such a target.

According to data from the National Bureau of Statistics, in 2010 the per-capita income was 19,109 Yuan ($3,000) for urban residents and 5,919 Yuan ($950) for rural residents. According to Li Yang, vice-director of the Chinese Academy of Social Sciences, as long as China has a 7.1% average annual GDP growth rate and a 7% per capita annual income growth rate, the goal of doubling Chinese people’s revenue will be achieved.

This is not surprising. Over the past 30 years, China has had an average GDP growth rate of over 9% per year. Even in the context of the economic crisis, it still maintains an average GDP growth of over 8% year on year.

Apart from the specific numbers of the target, there is a real novelty in how the central government is setting its goals, and suggests that Beijing is seeking more efficient growth, and is aiming to link ordinary people’s individual economic interests with the nation’s economic growth.

In the past, we have always placed more stress on overall economic growth. At the 16th and 17th Communist Party Congresses, the goal that was set was to quadruple China’s 2000 GDP by 2020. No concrete quantitative target about raising the income of urban and rural residents was put forward at either of the congresses. The fact that this is the first time that the goals of doubling both the GDP and people’s income have been set demonstrates the clear intention of China’s leaders to take into account people’s livelihood and social fairness at the same time as the country’s economic boom.

In the past 30 years, China has achieved great progress in its overall economic growth and people’s living standards have largely improved. But the growth of state wealth has outpaced that of the people. Numbers show that between 2002 and 2011, urban residents’ per-capita disposable income and rural residents per-capita net income increased 1.8 times. The Chinese government’s fiscal revenue grew 4.49 times during the same period.

Income distribution inequality

According to experts, China’s Gini coefficient, an international measure of inequality in income distribution, has long surpassed the 0.4 “cordon,” and is probably as high as 0.5. A score of 0 is perfect equality, a score of 1 means one person controls 100% of the country’s income. The regional development imbalances and the widening wealth gap are a great challenge to the stable development of China’s economy and society.

This shows why sharing the national cake has to be more democratic so that the people can enjoy the dividends of China’s economic growth. This has now become the rulers’ dominant ideology.

China’s economy is entering a mild growth period. As long as the external economic environment does not continue to deteriorate, the dynamics of current domestic economic growth makes achieving a 7% increase a certainty. As for the increase in urban and rural residents’ income, in the past decade, even after adjusting with inflation, they respectively reached a 9.2% and 8.1% growth; therefore, maintaining this momentum has a realistic basis.

However, this does not mean that all of this can be easily obtained. China’s decision-makers have clearly realized that the past practice of relying on exports and huge state investments to push up the rate of economic growth is neither economic nor sustainable. China’s investment in infrastructure is already very advanced. This provides a solid logistic base for China to further its economic growth in the future, but at the same time it also means that the space for an investment-led economy has become limited.

Besides, as China’s demographic dividend gradually decreases, its prospects for exporting will become less optimistic. Unless reforms are put forward to stimulate the vitality of the economy, even a 7% growth will be difficult.

Investment-led growth can easily lead to high inflation and thus reduce the wealth of the people. Large projects and large funds are more likely to flow to state-owned enterprises instead of the private sector.

Achieving these income-doubling goals will depend on reforms to eliminate the monopoly of state-owned companies and creating a market for interest rates. But such growth also requires major improvements to the country’s social safety net, and improving state transparency and the protection of the interests of ordinary people. Such reforms are essential for China’s creation of social wealth to be a lasting proposition.