As wealth expands in China, so does income inequality

Brian Wallheimer | Jul 06, 2017

Sections Economics

The gap between the wealthiest and poorest Chinese citizens has grown significantly over the past 40 years, according to research by Thomas Piketty and Li Yang of the Paris School of Economics and Gabriel Zucman of the University of California at Berkeley. Their dive into recently released data also finds that China’s economic system increasingly looks like those of wealthy Western countries.

Understanding China’s national wealth and income distribution has been difficult in the past because household surveys tended to underreport data for higher-income households. But in 2006, the Chinese tax administration began reporting household incomes, including for the wealthy. The researchers use these data to paint a clearer picture.

China began market reforms—which included decollectivizing agriculture, opening China to foreign investment, and providing opportunities for entrepreneurs—in 1978. That year, China accounted for 3 percent of the global gross domestic product. By 2015, it generated 20 percent, even though China’s share of the world population had declined from 22 percent to 19 percent.

China’s wealth-to-income ratio doubled from 350 percent in 1978 to 700 percent in 2015 as citizens saved and invested more and as asset values rose. The wealth ratio is now on par with levels in the United States and Western Europe. A significant portion of China’s wealth is in the hands of private individuals, as the percentage of wealth that was public property fell from 70 percent in 1978 to 30 percent in 2015.

Private households now own almost all the country’s housing stock—95 percent, up from just 50 percent in 1978. But China’s government still owns about 60 percent of equity in Chinese corporations, while 30 percent is private and 10 percent is owned by foreigners.

The buildup of private wealth is significant, as China’s ratio of private wealth to national income is 450–500 percent, nearing that of major economies of the West. The US sits at 500 percent, while the UK and France are in the 550–600 percent range.

“The major difference is that public wealth has become very small—or even negative, with public debt exceeding public assets—in Western countries, while it has remained substantial in China,” the researchers write.

While inequality between China’s richest and poorest has widened, it is still less than in the US. From 1978 to 2015, income for those in China’s top 10 percent rose from 27 percent of national income to 41 percent. During the same period in the US, the top 10 percent increased their share from 35 percent to 47 percent. The lower half of China’s share of income dropped from 27 percent to 15 percent. In the US, it’s 12 percent, and in France, it’s 22 percent.

The researchers warn that as they were working with improved but still imperfect data, the inequality gap may be even wider than their research suggests. Even so, they point out that the China of the 1970s resembled the more egalitarian Nordic countries of that time, and inequality was much narrower than in other European countries. Today, the income divide in China more closely resembles that of the US.