China’s Growing Inequality Is Undermining the Regime
This year’s session of the National People’s Congress takes on added significance with the impending anointment of the next generation of senior leaders. China would seem to have many reasons to be self-satisfied given the strong prospects for a “soft landing”, a mountain of foreign assets that Europe is eager to tap, and an expanding regional presence that the US has had to take notice of.
Yet the leadership recognises that the country faces daunting economic, social and environmental challenges including vulnerabilities created by past excessive credit expansion. Wen Jiabao, China’s premier, warned on Monday that growth is set to slow this year. It is aiming for a 7.5 per cent rise in gross domestic product, the first time since 2004 that the annual target has dropped below 8 per cent.
But these are likely to be seen as technicalities among those gathered in Beijing. Far more worrisome for the political elite is the question of how to deal with rising social unrest. This was underscored by the global attention given to the Wukan village land-related protests that pushed provincial leaders to support more open local elections. Other disturbances such as last year’s strikes by truck drivers in Shanghai and recent unrest by migrant workers at Foxconn reflect the tensions stemming from decades of widening social inequality that seems out of place for a regime that originated from egalitarian ideals.
For all of China’s economic successes - which lifted some 600m out of poverty - income disparities nevertheless have ratcheted up with the gini coefficient now at 0.47 compared with around 0.25 in the mid-1980s. This has fostered a sense that the system is uncaring, and that opportunities are now being determined by one’s status rather than initiatives.
There is a strong link between the growth in social unrest and the reality that the reform process launched by Deng Xiaoping three decades ago has stalled. Rising social tensions come broadly from two forces, namely limitations of China’s national budget and banking systems in addressing distributional needs and distortions arising from controls over use of land and labour.
A key weakness of the process of economic liberalisation is its failure to provide the fiscal means for the authorities to limit inequalities that came with rapid growth. China’s banking system - which is unique in handling a large share of the financing of public services that would normally go through the budget - accentuates these problems.