Thread: China’s widening income gap approaching dangerous level.

September 26, 2005


China’s widening income gap approaching dangerous level.



There were three articles in peopledaily.com.cn that are somewhat related. The first is about the six problems facing China in the twenty-first century. The second is about the very low per capita wealth of China which is only some 2% of the US. The third warns about the widening wealth gap which is reaching dangerous level. I’d like to comment on them at the same time as they are ultimately due to the same set of problems.

One of the problems of China is the pouring in of the farmers into the urban areas at the rate of some 12 to 13 million people per year. Presumably this is causing a problem in providing jobs and incomes to these urbanized farmers. Since the government is not able to find good jobs for these people, there is the danger of social unrest. The farmers are pouring into the urban areas because of the income disparity between the rural and urban areas with the income disparity reaching some 3.2 times at 9,422 yuans for the urban household and 2,936 yuans for the rural household. There is also the lack of good farming land which is causing many rural residents to be unemployed or underemployed.

The urbanized farmers are causing a problem as I said above because there are no good jobs with high incomes for them. If there were many good jobs with high incomes, then there would not be a problem as these farmers could be quickly put to work to generate high incomes for themselves while expanding China’s economy. Therefore, the problem is not the pouring of farmers into the urban areas. The problem is the inability of the Chinese government to implement wise economic policies to create hundreds of millions of jobs for these urbanized farmers. And the root of the problem is that the Chinese government is obsessed with doing subsidized exports and treats the urbanization as a distraction thus rendering them emotionally or intellectually unable to deal with the urbanization project with the urgent priority it deserves.

Going back even further, there is a fundamental misunderstanding of what the economic policies are supposed to accomplish. The CCP leaders and economists are managing Chinese economy like they are managing a candy store. The basic philosophy in managing a candy store is to sell as many candies as possible while not eating any of the candies by the store owners or the employees and to accumulate as much money as possible as a store of wealth. According to this economic analogy, the CCP economists see the overall economic objective of Chinese economic policies as exporting as much goods as possible and to accumulate as much foreign currency as possible as the store of national wealth just as the objective of the candy store is to sell as much candies as possible and accumulate as much money as possible. And as the a well run candy store prohibits the eating of any candies by the store owners and the employees, the CCP economists see the consumption of Chinese goods by the Chinese people as reducing the wealth of the Chinese nation. Therefore, the basic philosophy of the CCP economists is to export as much as possible while reducing the internal consumption. Furthermore, they see that wealth can only be created by exporting and that internal consumption is paid for by the wealth made by exports.

This is the wrong perception of the economic policies of a nation. The real goal of the economic policies of any nation is to create wealth in terms of the knowledge-base of the people, the productive capacities, and the infrastructures. These are to be created by expanding the productivity of the workers. And the productivity of the workers can be expanded only through the advancement of technologies and the managerial techniques. And the store of wealth in terms of knowledge-base of the people, the productive capacities, and the infrastructure can only be created by expanding the internal growth. Given this understanding, foreign trade is only important to import the resources, raw materials, and technologies or technological products that a country cannot produce. And the procurement of resources, etc. from foreign sources should be done as advantageously as possible by trading with as high a rate of currency value as possible.

Unfortunately, China has violated all these basic rules. It has neglected its technological advancement and thereby condemning China to import foreign technologies or foreign technological products. Even more unwisely, China has deliberately kept its currency value low so that it trades at a very serious disadvantage. Moreover, hard earned foreign exchange is being squandered by being embezzled by corrupt officials who steal tens of billions of dollars by official estimate and probably hundreds of billions of dollars in reality. Too much foreign exchange is also being squandered to pay for the foreign education of children of wealthy officials and wealthy merchants. Also too much foreign exchange is being squandered to import needless luxury goods such as wine, watches, cars, etc. that most Chinese could not afford and which suppresses the growth of domestic companies that produce these goods.

Since the Chinese currency is being devalued to 5 times below its real value, these effectively constitute a heavy subsidy to the exporters who cannot export their cheap low tech products except with the low yuan. This heavy subsidy is ultimately borne by the Chinese people as a whole thus reducing their purchasing power and stunting the growth of the Chinese internal economy. To see why low yuan is subsidizing exports, please see my post “Subsidized exporters are parasites” at the following link:

http://www.network54.com/Forum/threa...&lp=1107805397

Currently, China’s new jobs are created in the exports sector as exports grow at some 35% or more each year for the last several years. This is very unhealthy as the low yuan gives an extra advantage to the foreigners because of the exceptionally high value of the dollar and conversely put the Chinese domestic manufacturers at a serious disadvantage making them unable to compete for scarce resources such as water and electricity and other raw materials such as steel and aluminum. Thus the low yuan condemns the internal economy to languish while the foreign trade boomed to the ultimate disadvantage of the Chinese people as a whole.

The booming foreign trade is making the few Chinese people engaged in foreign trade rich. This creates the boom in the urban areas where foreign trade is concentrated. The boom causes an over-construction of such things as luxury office towers, luxury hotels, luxury housings, and luxury shopping malls which all cater to foreign investors and rich Chinese in the foreign trade. But this boom in foreign trade and urban areas also condemned the internal development to languish thus creating the inevitable income gap in the rural and urban areas. Furthermore, it also makes it impossible for the urban areas to provide abundant job opportunities because foreign trade is ultimately dependent on foreign demands which is already pretty much saturated. And ultimately incomes of workers working for foreign trade cannot rise above a certain minimum because exports, especially in low tech labor intensive products, depends on the cheapest labor cost in the world. Therefore this makes it inevitable that the wages of Chinese workers working for foreign trade to be the lowest in the world in dollar terms while at the same time making the rural incomes to be even lower still than the urban incomes due to the forced subsidies through low yuan value.

The need to keep the production cost of exported goods low makes it inevitable that environmental pollution considerations are neglected. While environmental degradation is listed as one of the serious problems of China, the Chinese government doesn’t seem to understand, or understanding chose to ignore it, that subsidized exports is one of the fundamental causes of China’s environmental degradation. If Chinese government makes internal development its main goal, then it could put many millions of workers to work to solve the environmental problem cleaning up rivers and lakes and implementing reforestation, etc. while demanding that manufacturers stop polluting the environment. Therefore, expanding internal development while cutting down on subsidized exports will quickly solve the environmental degradation problem while creating many high paying jobs.

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