A gesture, at least, towards Chinese redistribution and rebalancing

After eight years and much delay, China’s State Council has released its plan for addressing income inequality.

We’ll borrow a summary of the key points from Nomura’s Zhiwei Zhang:

· Raising minimum wages in most areas to 40% of the local average wage level by 2015.

· In state-owned enterprises (SOE), put cap on compensation for senior management, push for deferred compensation and clawback clauses for management, and impose a rule that management income growth should be slower than average staff income growth.

· Promote interest rate liberalization, make the deposit and lending rates more flexible.

· SOEs shall submit 5% more of their profits to the government.

· Strengthen income tax collection for high income individuals. Abolish exemption for foreign individuals’ personal income tax from their FDI dividends in China.

· Expand pilot program for property tax. Conduct research into the issue of introducing inheritance tax at the appropriate time.

· Impose a consumption tax on high-end service consumption and luxury goods.

Although the plan is all about income inequality, Zhang notes that its wording suggests the government is putting more weight on income growth rather than distribution (in otherwords, more of the same), because it starts out re-iterating the plan to double per capita income between 2010 and 2020, and does not target a specific Gini co-efficient.

That number, as it currently stands, indicates a very real risk, as the FT’s Simon Rabinovitch writes:

China’s Gini coefficient – the most widely used gauge of income disparity – rose to 0.474 in 2012, above the 0.4 mark often cited by analysts as a threshold for social unrest.

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Last year researchers at the Southwestern University of Finance and Economics in Sichuan province published a survey, which they said showed the Gini reading had spiralled to 0.61, putting China almost on a par with some of the world’s most unequal countries.

One of the most interesting parts of the plan concerns state-owned enterprises, whose strength and privileged position in the economy is a key challenge for economic reform. The plan states that the SOEs will have to raise their dividends paid to the treasury by 5 percentage points by 2015.

However Rabinovitch points out that this is what they were on track to reach anyway and UBS’ Wang Tao tells Bloomberg only some of that extra dividend goes towards the general public coffers.

So far we can’t find anyone who is convinced this is going to be enough to effect much change, or even that the targets will necessarily be pursued. The scepticism seems universal.

Nicolas Borst at the Peterson Institute for International Economics says it’s a step in the right direction, but cautions that:

As always, the key here is implementation. Without a series of follow up directives with more details, many of these policies are unlikely to be fully implemented.

Echoed by Zhang:

In the past we have witnessed cases where the central government has announced reform plans but implementation was not effective. It remains to be seen how soon and how seriously these measures will be implemented.

And SocGen’s Wei Yao:

There is nothing to agree with but everything to aspire to. We think the strategy is too comprehensive to be implementable. Besides, most of the points mentioned in the plan have already been suggested by either the five-year plan or by Hu’s Party Congress speech, and thus does not offer much new information about what the government is going to do. Having said that, the plan does show that the Chinese government has recognised the severity of economic (and social) imbalance and felt the urge to change. Hopefully, 2013 will be the year of action and the government’s good promises will be eventually fulfilled.

However we shouldn’t be too cynical, just yet. The comprehensiveness of the plan is encouraging, as Yao says. And the new administration has not even officially taken over — that happens in March. So it’s possible these aspirations will be firmed up in the future.

Related links:
- Time to address inequality in China? PIIE
- Beijing vows to raise minimum wages – FT