Inflation and Inequality

It is a truth, Zhu Rongji acknowledged, that a country with a Gini coefficient above 0.4 may be at risk of social unrest due to severe income inequality. While China’s official figure has been hidden for over ten years, South China Morning Post’s Tom Holland notes a recent study putting it as high as 0.53, and explains why this matters:

Such a fast-rising wealth gap is not just an academic pre-occupation; it inflicts real economic and social damage. The ADB estimates that if China’s economic growth between 1990 and 2008 had been achieved with no increase in inequality, an additional 110 million people would have been lifted out of extreme poverty.

To put that another way, 110 million people – equivalent to the entire population of Guangdong – with all the inhabitants of Hainan thrown in for good measure – are still living on less than US$1.25 a day because a few of their more well-connected compatriots got very rich first.

Naturally enough, these paupers have limited spending power, which is bad news for an economy looking to rebalance itself more towards consumption-led growth. Countries with widening income gaps, the ADB warns, also tend to have deteriorating growth prospects.

Abolishing the hukou household registration system and giving farmers land ownership rights, he suggests, could go some way towards addressing the problem. A China Daily op-ed on Thursday similarly recognised the urgency of reducing income inequality, and launched its own flotilla of proposed remedies. For example:

… [A] set of strict ownership definition standards should be set up to prevent the flow of State-owned assets to certain groups and individuals in the process of economic re-organization. At the same time, an effective monitoring system should be put in place to restrict or eradicate the power of individual local leaders in resource redistribution ….

In addition, the country should try to strengthen the trade union and wage negotiation system to help raise wages. At the same time, practical steps should be taken toward building an inclusive and balanced education system to uproot one of the key causes of the current income gaps.

Last but not least, the influence exerted by vested interest groups on the country’s income distribution policies should be eradicated by promoting a democratic, fair and transparent decision-making mechanism for income distribution.

Resentment of widening inequality is sharpened by the growing cost of living; an effort to tame one aspect of this by providing millions of affordable homes is already underway. But according to a recent Reuters report, the scheme’s numbers “don’t quite add up”, while the AP added this week that the subsidised accommodation drive would be “no cure-all”:

On paper, building affordable housing seems like a tidy way to provide inexpensive homes at prices low-income families can manage, while keeping property developers and other industries busy by generating demand for home furnishings, autos and building materials such as steel, copper and cement.

But whether the plan to provide housing for a fifth of the country’s urban families will achieve its aims is in doubt. Problems with financing, quality and corruption are plaguing the project. And for many, the prices are not low enough to offset disadvantages such as the out-of-the-way locations of the housing estates.

On Monday, meanwhile, The Wall Street Journal’s Tom Orlik reported higher than expected inflation figures:

Consumer prices rose 3.6% in March compared with a year ago, from 3.2% in February. That’s a move in the wrong direction, and higher than the 3.3% consensus forecast.

To examine the cause of the increase, it’s time to take another stroll to China’s countryside. Food prices rose 7.5% year-to-year, with sprouting vegetable prices the main contributor ….

The proximate cause of March’s inflationary rise might be a shortage of vegetables. But the underlying cause is the massive increase in the money supply in the past three years, and sharp rises in wages that means more of that money is ending up in consumers’ pockets.

Analysts’ comments collected at the WSJ’s China Real Time Report played down the severity of food inflation, calling it “benign so far in the year”, and predicting that high vegetable prices were merely “transitory”. The Financial Times’ Jamil Anderlini acknowledged that that the food price spike could be ominous, but argued that “in a sign that consumer inflation may resume its downward trajectory, China’s producer price index turned negative in March for the first time since late 2009, dropping 0.3 per cent from a year earlier.”

But in his latest Bloomberg World View column, Adam Minter pointed to netizens’ more heated views on food prices, in the wake of a magazine feature on almost-free lunches available to officials in government canteens.

The hashtag #One Sentence Attesting to Rising Prices# has spent much of the week at the top of the heavily censored trending topic list at Sina Weibo, attracting responses such as this anguished complaint by a netizen in Tianjin:

Lately, the fuel-price rises, the cooking-oil price rises, the green-vegetable price rises, the shampoo price rises, the wedding-celebration prices rise, even a pancake is 4.5 yuan…People can’t afford to drive, a meal, bathing, a wedding, even breakfast. Little is left in our pockets at the end of the month!

Under such circumstances, it isn’t surprising that a sizable number of tweets on Sina Weibo openly question whether the March consumer price index increase of 3.6 percent is actually a lowball estimate. “I went to the supermarket and bought a watermelon for 40 yuan,” a netizen wrote on Monday, and then cracked a joke: “There’s a mistake, CPI is 13.6 percent.”

There’s nothing new about anger at Chinese officials’ misuse of public funds for personal ends. It’s become such a problem that the use of public funds for international travel, automobiles and entertaining is characterized by the catch-phrase “the three consumptions.” They are, among other matters, a major source of corruption and, in the eyes of the Chinese public, a significant reason for the widening gap between the party cadres, and those they are supposed to be governing.


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