Spreading the wealth
China’s rapid growth over nearly four decades has been nothing short of remarkable. Some 700 million people have been lifted out of poverty, while the country has been transformed from an impoverished agrarian society into an industrialised economy with a burgeoning middle class.
However, growth hasn’t been evenly distributed. China’s wealthiest regions are in the eastern coastal provinces that host Beijing, the capital; Shanghai, the nation’s financial hub; the Pearl River delta, its workshop; and Shenzhen, China’s answer to Silicon Valley. The country’s interior is less affluent and scores worse on almost every measure of socioeconomic development.
This is changing, albeit slowly, as wealth fans out from the ‘tier one’ cities into the country’s economic hinterland. For example, we took average nominal wages in 30 ‘autonomous’ regions, provinces and so-called ‘provincial level’ cities, and converted those numbers into a percentage of the average nominal wage in Beijing.
We then looked at how those percentages changed in the decade to 2016 to get an indication of whether the income disparity had widened or narrowed. A percentage gain shows a narrowing of the income disparity, a percentage loss shows a widening.
Wage disparity narrows
Nominal average wage in 30 locations as % of nominal average wage in Beijing, 2006-2016*
Source: China National Bureau of Statistics, Aberdeen Standard Investments, 31 Aug 18
The average percentage gain over those 10 years was 4.2 per cent, according to data compiled by the China National Bureau of Statistics and our own calculations. Tibet and Xinjiang – among the poorest regions – saw percentage gains of 12.7 per cent and 8.5 per cent respectively. Yunnan, a province that borders Myanmar, Laos and Vietnam, experienced a percentage gain of 4.4 per cent.
This was due, in some cases, to government investment to fast track the development of specific regions. However, it’s also a reflection of how China’s manufacturing migrated away from the coast to cheaper inland provinces such as Sichuan (where the percentage gain was 8.9 per cent).
There are worrying signs that efforts to rebalance the economy – a move away from government-steered, debt-fuelled investment towards a consumption and services-driven model championed by the private sector – have stalled. In some important respects, rebalancing has even suffered a reversal.
For example, household consumption as a share of GDP fell last year, after rising to 39.5 per cent in 2016, from a post-global financial crisis low of 35.5 per cent in 2010. Meanwhile, the industrial share of GDP rose in 2017, as did the investment share of GDP. This is a blow to China’s new economy ambitions and a temporary reprieve for an older economic model that has seen better days.
Private sector profits fell in the 12 months to end-March, even as State-Owned Enterprises (SOEs) enjoyed profit growth. Private firms classified as ‘loss-making’ rose almost 40 per cent to some 32,000 in the nine months to end-March (the number of loss-making state-owned firms dropped). Asset-liability ratios, a measure of how much debt a company uses to fund its business, climbed sharply in the private sector (while the ratio fell for SOEs).
Government policies are largely to blame. As the economy slowed in 2014 and 2015, China responded with old fashioned stimulus and production quotas. Caps on the production of coal and other commodities raised prices, which benefitted producers – mostly SOEs – and penalised buyers, which are often private sector firms.
Policies to control shadow banking also cut financial lifelines to private sector companies which struggle to secure bank loans (because government-linked banks prefer to lend to government-linked borrowers). What’s more, there are signs that domestic demand has weakened, based on the latest household consumption data.
China is at a crucial stage of development. It is trying to reduce imbalances while transforming its growth model. Many of these reforms to the economic model will entail significant political change. Until the government is willing to allow the market play a ‘decisive’ role and reduce state control, there’s a risk China won’t achieve its long-term economic goals.
That’s not to say there hasn’t been progress in other areas. When I was in China earlier this year I was surprised by the clear blue skies over the capital. Beijing is notorious for its smog and dust storms. When the city hosted the summer Olympics a decade ago, policymakers forced cars off the roads and shut down nearby factories to make sure air pollution didn’t spoil the Games.
After decades of growth-at-all-costs China realised this wasn’t sustainable. In 2013, China’s State Council launched the Action Plan for Air Pollution Prevention and Control, which set targets for a reduction in dangerous PM2.5 air particles (those with an aerodynamic diameter of less than 2.5 micrometres); capped coal consumption; and mandated renewable energy growth, among other measures. The first phase of the programme spanned 2013 to 2017.
Last year Beijing enjoyed 226 days of ‘good’ air quality, with 23 days of heavy air pollution, according to CGTN, the English-language channel of state television1. This compared with 58 days of heavy air pollution in 2013. Average concentrations of PM2.5 particles fell some 33 per cent from 2013 to 2017 in the 74 cities where this data is tracked, according to Greenpeace2.
So things are getting better, but this is a long-term process and policymakers need to stay vigilant against backsliding for the sake of expediency. For example, improvement slowed last year when stimulus for heavy industry revived demand for coal, cement and steel. Too much of China’s old economy is still linked to polluting industries and, as we have already seen, policymakers aren’t quite ready to relax their grip on the economy just yet.