Growing inequality

The findings published in a Peking University report released on July 25, reveal the extent of China's social inequality. "One percent of households at the top level nationwide control more than one third of the country's wealth. Twenty-five percent of families at the bottom level only own one percent of the country's wealth," the website of the People's Daily newspaper reported on the university's statistics. The main reason behind the disparity is said to be the difference between wages in the cities and the rural areas.

The report also included the Gini coefficient, a measure of income distribution with 0 representing total equality and 1 representing total inequality. Government statistics claim the figure stood at 0.47 in 2012, which would put it close to the US, which had an index figure of 0.56 in 2009, according to the World Bank.

James Rickards, a US writer, lawyer and economist, says in a DW interview China has now surpassed the US in terms of income inequality, adding that both countries are approaching the point where this disparity becomes so extreme that it threatens to cause social disorder.

DW: What is driving China's growing wealth gap?

James Rickards: Most of the income inequality in China can be explained by corruption and elitism. In the 1980s and 1990s, under the leadership of Deng Xiaoping, China reformed its system of state-owned enterprises (SOES). Some of these SOES were closed, some were privatized, and some remained SOES, but were designated as national champions in their respective industries and allowed to thrive free of normal competition.

In each case, stock in the privatized companies or senior management roles in the new national champions was given to loyal Communist Party cadres and to so-called "princelings" who were the sons and daughters of leading officials or survivors of the Long March days of Mao Zedong in the 1930s. During the export and investment led boom that followed, these enterprises made enormous profits which went principally to the owners and senior managers and not to the workers.

This boom has continued beyond the bounds of normal expansion through China's over-investment in infrastructure, much of which is wasted. In effect, China is misallocating national wealth in favor of the SOES and private companies favored by government, which enriches a few at the expense of the nation as a whole.

How unequal has the current Chinese economic system become in comparison to capitalist systems in countries such as the United States?

Income inequality is a global problem. It has always existed in traditional oligarchical systems such as those in South America. It was less prevalent in North America and Europe and former Commonwealth nations that had a strong rule of law and offered good economic opportunities to those people who did not necessarily start out from a privileged position.

It was also not much of a problem in Communist nations such as Russia and China because there was relatively little wealth to begin with. Elites may have lived better but they were constrained by the relative poverty of their countries. Since the new age of globalization began in 1989, China and Russia have become much richer, which increases the opportunities for cronyism and theft by elites.

The situation in the US is exacerbated by bank and auto bailouts, other forms of government favoritism, and an opaque and complex tax system. The causes of income inequality in China, Russia and the US are different but the result is the same. China has greater income inequality than the US, but both countries are approaching the point where income inequality is so extreme that it threatens to cause social disorder.

The ruling Communist Party aims to preserve social stability to avoid any challenge to its grasp on power. How big of a concern is this widening wealth gap to China's Communist Party?

Income inequality should be deeply disturbing to the Communist Party leadership because it has historically been a source of social instability in China. The demonstrations and massacre in Tiananmen Square in 1989 were in part attributable to increasing inflation, which is a form of income inequality because it is most damaging to those with fewer investment options to hedge against inflation.

However, the Chinese elites are themselves the main beneficiaries of income inequality in the short run. Capital flight from China is accelerating, which is a sign that at least some elites have adopted a "take the money and run" attitude and no longer care about continued Communist Party dominance provided they can extract enormous wealth from the country before the social disorder become more pronounced. The widening wealth gap is troubling, but it is not clear whether there is much political will to stop it.

What can the Chinese government do to keep the wealth gap from widening?

China could rebalance its economy away from wasteful investment, which mainly benefits elites in construction and related industries, toward consumption and services, which provides more opportunities for middle-class workers.

China could also invest more in education so that everyday citizens could participate in more high-value-added labor as a way to earn a larger slice of national income. China could also enforce its laws against corruption, bribery and cronyism more rigorously and clamp down on tax avoidance and capital flight.

James Rickards is a US writer, lawyer and economist. He is Chief Global Strategist at the West Shore Funds, and a visiting lecturer in globalization at Johns Hopkins University. He is also the author of New York Times best seller, The Death of Money. You can follow him on Twitter @JamesGRickards.