CityReads│Piketty on the Rising Inequality in China, 1978-2015

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Piketty on the rising inequality in China, 1978-2015

Piketty and his coauthors presents the first systematic estimates of the levels of income and wealth inequality, and structure of China’s national wealth between 1978 and 2015. 

Thomas Piketty, Li Yang and Gabriel Zucman，Capital Accumulation, Private Property and Rising Inequality in China,1978-2015，

Source: https://wid.world/document/t-piketty-l-yang-and-g-zucman-capital-accumulation-private-property-and-inequality-in-china-1978-2015-2016/

Picture source: https://www.thenation.com/article/the-inequality-industry/

Since the market reform in 1978, China has undergone immense changes in the past decades and its economy has become an indispensable force in the world. Despite the decline in its share of world population, China’s share of world GDP increased from less than 3% in 1978 to 20% in 2015.

According to official statistics, real per adult national income was multiplied by more than 8. While average adult national income (expressed in 2015 euros) was about €120 per month in 1978, it exceeded €1,000 per month in 2015.

However, relatively little is known about how the distribution of income and wealth within China has changed over this critical period. That is, we do not have consistent estimates of the extent to which the different income and wealth groups have benefited (or not) from the enormous Chinese macroeconomic growth.

Relying on five types of data sources: national income and wealth macro accounts, household income surveys, income tax data, household wealth surveys, and wealth rankings, the research team led by Thomas Piketty provides consistent series on the accumulation and distribution of income and wealth in China over the 1978-2015 period. Because of more comprehensive and updated data sources, the results of this study are much closer to the truth than previous official and other studies have published. However, due to current lack of transparency about income and wealth data, inequality in China may still be underestimated.

There are two main findings: First, the national property structure in China is that of mixed economy, with a large share of public property: about 30% of national wealth in 2015 belongs to the government, including about 60% of domestic corporate equity. This is slightly higher than the share of western mixed economies with property in the 20 years since the second world war. But the public share has stopped declining since 2007-2008 and might be a long-lasting feature of the Chinese economy. Second, since market reform, income and wealth inequality in China has significantly increased. China used to be more equal than Europe in the late 1970s—about as equal as the most egalitarian Nordic countries—while it is now approaching U.S. inequality levels.

1 Income inequality is widening

With the statistics in 2015, although the average income in the entire adult population is 57,800 yuans, income inequality is very serious when comparing data from different groups. The problems are mainly at the top and bottom. The bottom 50% earns 15% of total income. By contrast, the average income of the top 10% is more than 4 times the average income in China. Hence the top 10% earns more than 40% of total income. The middle 40% earns a bit more than 40% of all income, so that their average income is slightly higher than the average per adult income.

In vertical time, market reforms have contributed to a substantially rise in income inequality. By their estimates, the share of national income going to the top 10% of the population has increased from 27% in 1978 to 41% in 2015, while the share going to the bottom 50% has dropped from 27% to 15%. Over the same period, the share of income going to the middle 40% has been roughly stable。

2 Urban-rural divide exacerbates

Over time, the urban-rural income gap widens. urban households earned on average twice as much income as rural households in 1978; they now earn 3.5 times as much. Although urban population is growing, it is clear that income is growing much faster.

Despite the increase of the urban-rural gap, the root of China's inequality lies mainly in the income inequality within urban and rural areas. The top 10% and top 1% income shares have increased almost as much within urban and rural China as nationally. It is also interesting to note that there has always been more inequality within rural areas than within urban China.

One can see the strong effect of the urban-rural gap when we look at the bottom 50%. The income share of the bottom 50% has sharply declined between 1978 and 2015, both within rural and urban China and nationally. The bottom 50% income share, however, is markedly lower at the national level (15%) than within rural China (20%) or urban China (25%) alone.

3 Who benefitted from the enormous growth of China?

In the late 1970s, China used to be substantially more equal than France and the United States. In the mid-2010s, it is more unequal than France (a country that is broadly representative of European inequality levels), and is now approaching U.S. inequality levels. While the top 10% income share rose from 27% to 41% in China between 1978 and 2015, it increased in smaller proportions in the USA (from 35% to 47%), and only moderately in France (from 31% to 33%). Despite its larger population, however, China remains significantly more equal than the United States.

We can quantitatively assess the extent to which the various groups of the population have benefitted from the enormous growth of China. In China, average income for the top 0.001% has been multiplied by almost 40 since 1978 (+3817%, vs +811% for macro growth) and in the US the top 0.001% has been multiplied by almost 8 (+685%, vs +59% for macro growth).

The key difference between China and the United States is that in China the bottom 50% also benefited enormously from growth: the average income of the bottom 50% was multiplied by more than 5 in real terms between 1978 and 2015, which is less than macro growth and top income growth, but still very substantial. Presumably this increase can make rising inequality much more acceptable, especially for a country starting from very low living conditions—at least until a certain point. In contrast, bottom 50% income growth has been negative in the United States (-1%).

4 Wealth inequality in China

Average wealth reaches 282,000 yuans per adult in 2015, about 5 times average income. That is, the private wealth to national income ratio is around 500%. Wealth is significantly more concentrated than income: the top 10% share is 67% for wealth, versus 41% for income. The top 0.001% alone—the 10,653 richest adults with net wealth above €66 million—owns 5.8% of total wealth, about as much as the bottom 50%—the 531 million poorest adults.

Consistent with the trend for income inequality, wealth concentration has sharply increased. The top 10% wealth share increased from 40% in 1995 to 67% in 2015, while the middle 40% and bottom 50% wealth shares collapsed. As a result, while wealth inequality used to be much lower in China than in the Western world in the mid-1990s, it is now intermediate between Europe and the United States (Figure 28). The Chinese top 10% wealth share (67% in 2015) is getting close to that of the United States (72%) and is much higher than in a country like France (50%). The bottom 50% wealth share is now barely higher than in rich countries, where it is usually around 0%–5%.

5 The structure and sources of national wealth

First, the Chinese national wealth-national income experienced a huge increase from 350% in 1993 to over 700% in 2015. The main reason lies in the change of property structure, with sharp contraction of agricultural land and the booming rise of housing and other domestic capital. Moreover, net foreign assets have become a significant addition to China’s national wealth since the mid-2000s.

The most spectacular evolution involves the division of national wealth into private and public wealth. In 1978 about 70% of national wealth was public and 30% private, while in 2015, it was the opposite:  30% was public and 70% private. During the privatization process, the expansion of real estate has been particularly marked compared with other  domestic capital, which rose from 50% in 1978 to 95% in 2015.

The structure of national property is of great significance to economic development. When comparing China to other countries, the private wealth-national income ratio in China is now close to Western levels. But the key difference is that the public wealth in western countries has become very small-even negative, with public debt exceeding public assets, while the public wealth in China is still considerable.

We can decompose the wealth accumulation by sectors and assets segmentation:

(1) In terms of private wealth, non-financial assets(mainly housing) has obtained strong positive capital gains while financial wealth has no gains.

(2) Regarding public property, the result is the opposite: public financial has strong capital gains, while capital gains from public non-financial wealth are small. The large capital gains on public financial assets mostly come from government-owned equities, and can be linked to the reform of SOEs since 2003 and the unprecedented wave of initial public offerings of SOEs that started in 2006.

(3) China also made capital losses on its net foreign assets, in part due to the appreciation of the yuan after 2004. This explains why given despite its large current account surpluses, the net foreign asset position has increased only moderately (from -9% of national income in 2000 to 15% in 2015).

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