China’s Wealthy Getting Richer in a Declining Economy

As China’s economy declines, inequality is growing. A recent study by Yu Xie and Xiang Zhou finds that China’s Gini coefficient surpassed 0.50 in 2010, remaining high through the present period. Despite the decline in investment and production, the sheer number of wealthy is increasing—Forbes states that China had 157 billionaires in 2013. The number of high net worth individuals, individuals with over US$1 million of investable wealth, rose by 17.8% in 2013 to 758,000, according to consultancy Capgemini and RBC Wealth Management.

Rapidly increasing wages in the financial and IT industries, contrasted with stable or slowly increasing wages in most other sectors (for example, utilities, construction, and transportation) has led to a sharp divergence between the income of the average worker and incomes of workers in privileged industries. What is more, the skyrocketing pay of top executives has enriched certain individuals over the masses.

China’s private financial wealth amounts to US$22 trillion, according to the Boston Consulting Group. This is equivalent to well over double China’s GDP in 2013. While the average per capita income was US$6,747 in 2013, Chinese executives averaged well over US$100,000. The poorest workers have also face delayed or partial payment of wages. In many cases, this has led to protests and legal action against employers.

Many of China’s super rich experienced poverty in their earlier years, and 80% of the super-rich became wealthy by building up their own businesses. The argument against burgeoning inequality is not that the wealthy have not worked hard to obtain their status, but rather that their status is far higher than that of the working man or woman. It is also that the current and changing economic structure in China appears to preserve this yawning income gap.

The wealthy, although no longer purchasing as many luxury goods or properties in China, due to a crackdown on corruption and luxury gift-giving, are purchasing real estate abroad. A study by Hurun earlier this year showed that China’s rich invest on average 16% of their wealth abroad. China’s wealthy quite visibly purchase properties in the United States, Australia, Canada, Switzerland, and other developed nations. An exposé last year also revealed that many Chinese wealthy (22,000) were moving their money offshore, to tax havens such as the British Virgin Islands. Much of China’s wealth is therefore not being recirculated in China’s own economy but rather spent or saved in other nations, to the detriment of the country’s growth prospects.

As the financial sector grows and liberalizes even further, returns to finance and other lucrative industries will only increase, as sectors with lower returns maintain wages barely in keeping with food price increases. Political favoritism of company executives is also problematic; well paid “princelings” have often been involved in graft and other types of corruption, without sufficient punishment.

There is concern, too, that as China restructures its economy away from a manufacturing economy toward a consumption-led, service-based economy, that individuals with lower skills will be left out, particularly as low skilled jobs move abroad to countries like Vietnam. While China’s middle class may benefit from the change, the middle class is smaller than in the United States and elsewhere. Currently, the middle class comprises about 30% of the population. Expansion of the middle class is contingent upon the ability of lower-class workers to transform themselves into white-collar workers, for which there are substantial barriers. The transfer of funds out of China by the wealthy will continue to dampen China’s economic prospects and reduce the money multiplier, presenting a challenge to expanding business and enhancing access to funds.

Inequality is not a new problem—it has been clear for years that China’s divergence in incomes of the lower and upper classes is a serious issue. It is, however, disconcerting that current conditions have only made this disparity starker. Images of wealthy Chinese purchasing goods and properties abroad are ubiquitous, while the goods themselves are less likely to bear the “Made in China” label. This is an injustice to working people and retrograde economic development.

Policy solutions might include redistribution, improved limitations on foreign investment, support for some low-skilled, labor-intensive jobs, and more social spending. Without such policies, inequality will continue to grow unceasingly.