Red Pall over China

Great piece from the FT on China's hidden inequality issue, a day after China's economy overtook Japan's.

China’s grey economy
August 19 2010
It is usually pleasant to find some extra money hidden under the mattress. So the claim that China has at least Rmb10,000bn ($1,472bn) in “grey” or undeclared income might be good news – more wealth for the government to tax and perhaps a bit more potential spending from Chinese consumers. Yet dismay should be the Politburo’s principal response to the findings of a recent study by the National Economic Research Institute, a non-governmental group.

The study, sponsored by Credit Suisse, is based on more than 4,000 anonymous interviews in 64 cities around the country. It provides a cross-check to the official quarterly income reports from the National Bureau of Statistics. When asked by the authorities, households seem routinely to understate their wealth, out of fear that the taxman will get the data. Incomes according to NERI are on average 90 per cent higher than the NBS version. The gap was 78 per cent three years ago.


What’s more, the wealthiest 10 per cent have a NERI average per-capita income of Rmb97,000, 65 times that of the poorest 10 per cent. That ratio was 55 times in the 2005 NERI study. The 2008 NBS calculation came up with 23, high enough to give China a Gini index ranking, a measure of wealth inequality, on a rough par with the US. The unofficial number puts China in South American territory.

Premier Wen Jiabao, for whom fairness and justice are “more glorious than the sun,” wants to help the most downtrodden urban workers. The upcoming 12th five-year economic plan is expected to go big on reforms of income distribution. The NERI study, supported by strong anecdotal evidence, suggests he is fighting a losing battle. Hidden stock gains, property deals and plain old hongbao – red envelopes stuffed with cash – are forcing China’s rich/poor divide wider by the day.