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China’s Hidden Wealth Feeds an Income GapBy DIDI KIRSTEN TATLOW26 January 2012The Chinese economy is a little like the Milky Way: we keep discovering it’s larger than we thought, the difference may run in the trillions, and much is hidden from view.As year-end reports on 2011 emerge from companies and organizations around the world, an astonishing picture is building of extravagant, high-end Chinese spending that offers a glaring contrast to the hardscrabble, high-saving image of most Chinese.Wealthy Chinese are snapping up gold, Rolls-Royces and yachts, Louis Vuitton, Chanel and Gucci faster than ever before, with increases registering not in baby steps, as a decade ago, but in giant leaps — 20, 50, even 80 percent, year on year. The Chinese have become the world’s biggest duty-free shoppers.Where is all the money coming from?Tantalizing research by Wang Xiaolu, deputy director of the National Economic Research Institute at the independent China Reform Foundation, based in Beijing, may offer a kind of Kepler telescope for viewing the economy at something like its true size.In an interview last week at a Beijing restaurant, where incense swirled around a bust of Lu Xun, the critical, celebrated 20th-century writer, Mr. Wang said the hidden, or “gray,” economy, already very large, had grown significantly since the government began its giant stimulus package in late 2008 in response to the global economic crisis.“It was already about 9.3 trillion renminbi” annually, or $1.47 trillion, said Mr. Wang, whose mild manner belies the explosive nature of his work.The stimulus, a mix of central and local government investment whose real size is unclear but is believed to far outstrip the official total of 4 trillion renminbi, hit channels already flush with cash, said Mr. Wang.The clue? Last year’s runaway luxury spending.“Today, looking at the luxury goods purchases, looking at the signs, it’s still a very serious issue,” said Mr. Wang, who gives the impression of being a careful man who doesn’t rush to speculate. “I think the pace of increase of the gray economy is very fast.”Officially, the Chinese economy grew 9.2 percent last year, reaching 47.16 trillion renminbi. Mr. Wang’s two reports on the hidden economy, published in 2007 and 2010, suggest that gray economic activity is growing faster than gross domestic product.Of course, the Chinese economy has been growing rapidly for about three decades, creating much legitimate wealth. Incomes are rising, about 8.4 percent in real terms in the cities last year, Mr. Wang said.Yet “average incomes haven’t risen as fast as luxury spending,” suggesting that the luxury spending is being fed by other, hidden sources, he said.The government knows that many people hide their income. The day before our interview, the head of the National Bureau of Statistics, Ma Jiantang, made what Mr. Wang considered “a very interesting” statement to the news media.Asked by reporters why the bureau didn’t publish a figure for China’s overall Gini coefficient — a measurement of income inequality — Mr. Ma said it was because they knew their figures for high earners were wrong and therefore any results were inaccurate.“The National Bureau of Statistics’ firsthand data are inaccurate,” said Mr. Wang, marvelling that they admitted it.The admission is particularly satisfying for Mr. Wang, who in 2010 became embroiled in a public dispute with two officials from the bureau who called Mr. Wang’s gray economy figure “too high.”“They said they were representing themselves, but they weren’t,” he said, smiling slightly.Using innovative research techniques that bypassed official data, Mr. Wang estimated that not only were trillions of renminbi failing to appear in official assessments, but about two-thirds of it belonged to the top 10 percent of the population.His conclusion: the rich were hiding their wealth, and society was far more unequal than the government was admitting — a politically sensitive subject.
How much has the hidden economy expanded since the stimulus?“I don’t have the figures, so I just don’t know,” said Mr. Wang, pointing out that many people, not just the superrich, have the opportunity to hide income. “But the last few years have not seen systematic development. It has not been transparent.”Disbursement of government investment has created enormous opportunities for “rent-seeking behaviour” or special favours, said Mr. Wang, adding: “In reality, that’s corruption.”Under pressure to expand local economies, officials have stepped up seizures and sales of farmers’ land, a frequent cause of unrest. “Land sales have been a really big factor. Local officials have been continually selling land in a completely unsystematic way,” leading both to more income and to very uneven distribution, with farmers rarely getting anything near the value of their land, he said.In an article in Caixin Online published on the same day as our interview, titled “How to Accurately Count Rich People’s Income,” Mr. Wang noted that squirreling away money and lying about income were hardly exclusively Chinese phenomena. “These conditions also exist in developed countries, but there are major differences when it comes to extent,” he told Caixin.Some economists estimate that the Chinese income gap, as measured according to the Gini coefficient, is currently around 0.48, above the alert threshold of 0.4, with 0 representing perfect equality and 1 representing perfect inequality.Yet no one really knows where it lies. To correct that, China needs to begin systematic political, financial and administrative reform aimed at establishing the truth, Mr. Wang told Caixin. It must increase transparency and strengthen the public’s ability to monitor power-holders, he said. “These are the basic ways to solve the problem,” he told Caixin.After all, he told me: “When economic reform began back in 1978, it was never meant to happen alone. There was supposed to be political reform, too.”
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