Written by Michael Tonetti, Global Economic Intersection Associate
The disparity between China’s urban upper class and rural lower class is perhaps the biggest social issue facing President Xi Jinpig’s China. The rise of capitalism over the past 30 years in the previously communist country, however, provides the ‘G2 consumer’, or second generation of the capitalist Chinese, a chance to rise up and break through to upper-middle class socio-economic status.
Fellow GEI contributor Michael Pettis has argued over the past couple years that
“…the fundamental imbalance in China is the very low GDP share of consumption.”
In other words, although China’s economy has been producing at unprecedented rates, the quality of life has improved slowly due to a lack of its non-upper class citizens sharing the prosperity that the economy has generated. China has accelerated investment since 2000 to achieve an extraordinarily high portion of GDP (around 50%).
Pettis describes the situation as one that victimizes the citizenry of China:
“…the fundamental imbalance in China is the very low GDP share of consumption. This low GDP share of consumption, I have always argued, reflects a growth model that systematically forces up the savings rate largely by repressing consumption, which it does by effectively transferring wealth from the household sector (in the form, among others, of very low interest rates, an undervalued currency, and relatively slow wage growth) in order to subsidize and generate rapid GDP growth.”
(Graph from Samuel Sheridan, World Economic Roundtable, New America Foundation.)
The process to overcome the imbalance will not be easy for China. According to Gan Li, professor at Texas A&M University:
“Depending on market forces alone can’t resolve the gap and China must change the structure of income distribution and rely on massive fiscal transfers to narrow such a yawning disparity.”
The Income Distribution Plan, introduced by the State Council this past February, looks to reform these imbalances. The plan is
“…aimed at boosting minimum wages to at least 40 percent of average salaries, loosening controls on lending and deposit rates, and increasing spending on education and affordable housing.” (US-China Economic and Security Review Commission)
With masses of its population living in or just above poverty, a shift from monetary investments and exports to more widespread consumption and improved social welfare should and will have major positive effects on the living standards of both rural and urban inhabitants.
The gap does indeed seem to be narrowing, even before this wealth redistribution plan is put in place. China’s urban middle class stood at 4% of the nation’s urban population in 2000. Last year, that number had risen to over 67%, and
“…in less than a decade, more than three-fourths of China’s urban households will approach middle-class status on a purchasing-power-parity basis.” (McKinsey & Company)
China seems to be determined to make the necessary effort to move to a more equitable distribution of income and to increase the consumption class to be a major part of their population. That would put China on a different path than they have been following the past two decades. That would put China on a different course than the U.S. which has seen increasing GINI since the 1960s as income distribution has been becoming more unequal. The following graph shows the GINI coefficients for a number of countries over the past 60+ years.
Graph from Wikipedia.
The GINI coefficient measures the degree of evenness of income distribution, with 1.0 representing extreme inequality and 0 representing absolute uniformity.
By 2022, the total number of middle class consumers is expected to rise to 630 million or approximately twice as many people than are living in the United States right now. Undoubtedly, change is coming to the class structure that has plagued the most populated country in the world. Diplomat.com estimates that that middle-class consumption will add $3.4 trillion of goods and services to China’s GDP in the next 10 years. This is a market just waiting to be tapped, and aside from the people of China greatly benefitting, the United States could use this future market as a way to cut into its own debt and improve its lacking industrial manufacturing. Of course the U.S. will have to compete with the rest of the G-20 countries and smaller emerging economies as well.
Sources:
- China: Misallocation and Overinvesting? (Michael Pettis, GEI Analysis, 04 December 2011)
- Mapping China’s middle class (Dominic Barton, Yougang Chen and Amy Jin, McKinsey Quarterly, June 2013)
- Winning the battle for China’s new middle class (Max Magni and Felix Poh, McKinsey Quarterly, June 2013)
- Putting China’s Low Household Consumption in Perspective (Samuel Sheridan, World Economic Roundtable, New America Foundation, 15 March 2011)
- China’s next chapter: The rise of the Generation-2 consumer (McKinsey Interview, June 2013)
- China Survey Shows Wealth Gap Soaring as Xi Pledges Help (Bloomberg News, 09 December 2012)
- China’s New Income Inequality Reform Plan and Implications for Rebalancing (Nargiza Salidjanova, U.S.-China Economic and Security Review Commission, 12 March 2013)
