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Measuring the Wealth Gap

‘Gray Income’ Pads Pockets of China’s Rich, Survey Shows

Recent findings by China Society of Economic Reform (CSER) have offered a rare glimpse into growing income inequality in the country.

The study shows that in 2011 unidentified “gray income,” or the difference between CSER-surveyed income and that of the official household survey, totaled 6.2 trillion yuan, or 12 percent of GDP. The richest 10 percent of families had an annual income that was twenty-one times the lowest 10 percent, much higher than the official estimate of 8.6 percent.

The 2012 research by the CSER covered 5,344 urban families in eighteen provinces and municipalities. Previous surveys were completed in 2007 and 2010. This new survey is aimed at painting a picture of how the income of urban residents has changed in the last three years.

The result has highlighted expanding social inequalities and policy issues surrounding official corruption and income distribution. The high gray income is linked to the loose credit handed out between 2009 and 2010, as well as the rapid increase of government investment during the same period. When administrative power lacks proper checks, the government intervenes in resource allocation and state money can easily be channeled out into private pockets.

To stop widening income disparity and unfair allocation, in addition to anti-corruption campaigns, there needs to be gradual but firm progress in economic, political and social reform that moves the country closer to the rule of law with public scrutiny over administrative power.

Oozing Income

The National Bureau of Statistics (NBS) performs an annual study of urban household income. The NBS’ data falls into seven categories, and the result, especially for the highest 10 percent income bracket, is significantly different from the CSER’s data. The gray income, or the income not counted by official survey, is the main cause of the difference.

The richer the household, the more likely it receives shadow income. Our survey shows that the top 20 percent of high-income urban Chinese households takes 72 percent of total gray income. Their increase of income in the last several years can be attributed to an enlarged shadow income base. 

Compared with our survey three years ago, more middle income families have sources of gray income; the disparity between the NBS and CSER on these brackets is expanding. This tells us that invisible income oozed out from the rich to cover more medium to high-income households, possibly a result of expanded corruption and weak rule of law. The expansion does not mean all residents in those brackets benefit from corruption. Only a small group of people had rent-seeking opportunities; their increased income is at the cost of other citizens.

Dangerous Gini Index

The income gap uncovered by the CSER’s survey is also wider than NBS’ estimate, but compared with past data it shows signs of narrowing.

The top 10 percent of household income is 20.9 times that of the lowest 10 percent, compared with NBS’ 8.6 times. It is, however, lower than the institute’s 2007 survey of 26 times.

The picture is different once rural household income is factored in. If we compare the average of the top 20 percent urban income and the bottom 20 percent of rural income, the gap is 67 times, larger than 2008’s 64.6 times.

To put that in terms of the Gini index, which measures income distribution on a scale of 0 to 1, where the greater the value means higher inequality, China’s index number in 2011 was 0.496 for urban households, much higher than the NBS’ figure of 0.324.

There is no reliable data on rural residents’ income, but given the rural-urban disparity, it’s safe to say that once rural incomes are included, the national Gini index is even higher. 

Considering this Gini figure, China is in a dangerous zone as one the most unequal countries in the world.

The High Income Group

The CSER survey showed some similarities among people with high incomes.

High-income groups tend to have higher business and investment gains. Those with annual individual income of less than 20,000 yuan draw 80 percent of their income from their salaries. But rich families who are able to add more than 1 million to their bankbooks each year get only 11 percent of wealth from salaries; 80 percent comes from businesses; and 6 percent from gains on assets.

Different income groups fare differently in dealing with the financial market. Mid- to low-income families usually see losses in investments in stock markets, the housing markets, and other financial markets. But high-income families tend to have decent gains. This seems to verify the allegation that China’s capital and real estate markets are in effect moving money from the poor man’s pocket to the rich man’s.

We can’t rule out that some of these business gains are problematic, or even illegal, because many survey takers count kickbacks as business gains.

The government’s transfer payments, which aim to help the poor, benefit the bottom of the medium group more than the low-income group. This is because the bulk of transfer payments are not government funds designated for the poor, but pension and other payments to the middle to lower-middle income groups; these are things the poorest people do not have access to.

In terms of occupation, workers and basic service providers are in the 10,000 to 20,000 yuan annual income group; mid- to higher-level professionals and government officials and party cadres are in the 50,000 to 100,000 yuan bracket; and the group making more than 1 million yuan is reserved for business owners and company partners.

Housing ownership also shows some patterns along income lines. A total of 13.6 percent of urban households have more than two houses, and more than half of those with income higher than 300,000 yuan own multiple homes.

The social safety net coverage is tilted toward the high-income group. Out-of-pocket payments account for 72 percent of medical expenses for urban dwellers with less than 10,000 yuan annual income, but less than 50 percent for those with higher incomes.

In terms of absolute expense, those with income of less than 10,000 yuan had an average of 73 yuan in medical expenses reimbursed by the government, but those with income of more than 300,000 yuan had 1,545 yuan reimbursed. This shows that the current medical system does not serve the purpose of balancing income and protecting the society’s most fragile groups.
 
One reason is that there is a threshold to trigger government reimbursement, ranging from hundreds of yuan to 1,000 yuan every year. Any expense below this level is paid by patients. Low-income people who keep their expenses under this level cannot benefit from medical reimbursement, but a high medical bill, usually associated with more affluent families, is eligible for a higher proportion paid back by the state.

Another reason for the poor medical safety net for the poor is that the current medical system provides deplorable coverage for migrant workers. In 2012, only 16.9 percent of migrant workers had medical coverage.