THE CONCEALED NPL problem in the banking system is only one downside to arise from the two-decade-old, state-dominated economic approach that took hold several years after the Tiananmen interlude from 1989 to 1992. In fact, a potentially more ominous problem for China can be seen in the relationship between its increasingly “unstable, unbalanced, uncoordinated and unsustainable” economic model and the lingering challenge of its aging demographics. This poses a mutually reinforcing and potentially vicious downward spiral for the country’s long-term economic viability.
Thus, China faces the prospect of becoming the first major country in history to grow old before it grows even moderately rich. This is a function of both its stagnant agrarian economy resulting from the socialist experiments in collective agrarian and industrial production of the Mao Zedong years and the fact that life expectancy has risen dramatically over the past three decades due to public-health advances. But one cannot solely blame Mao’s legacy or even the three-decade-old one-child policy for China’s predicament. Chinese Communist Party (CCP) policies since the early 1990s have resulted in outcomes that leave the country woefully unprepared for its aging demographics despite the country’s sustained period of rapid economic growth.
Economic growth has far outpaced population growth since the 1979 reforms. Indeed, per capita income has increased from less than $200 in 1980 to $7,800 (based on purchasing power parity and in constant 2000 U.S. dollars). Based on current growth rates, GDP per capita should reach middle-income levels of around $16,000 in a decade’s time.
However, focusing only on dramatic increases in GDP per capita as a measure of China’s economic and social progress is highly misleading for two reasons. First, in China’s state-dominated economy, revenues of the country’s tens of thousands of SOEs have been rising at an average of 20–30 percent each year since the mid-1990s. It is estimated that half of all domestic savings in the country’s financial system is by SOEs.
In contrast, mean disposable household incomes have been rising by only 2–3 percent a year over the same period. Ominously, various studies suggest the disposable income of some four hundred million Chinese has actually stagnated or declined over the past ten years. Other studies suggest that absolute poverty (defined as living on less than $1.50 per day) has actually increased over the same period. Currently, just under half the country is subsisting on less than $2 per day.
Second, dividing national output by the number of people gives no indication of how wealth is actually distributed throughout the country. In reality, when considering measurements of income distribution such as the Gini coefficient, China has gone from being the most equal society in all of Asia to the least equal within a generation. Its Gini coefficient level has risen from 0.25 in the 1980s to 0.38 in the 1990s to 0.57 currently (where 0 represents perfect income equality and 1 represents perfect income inequality). In contrast, the Gini coefficient in India is 0.37; it is 0.43 in the United States, 0.38 in Japan and 0.42 in Russia. The reality is that, although Chinese households have the highest savings rates in the world as a proportion of disposable income, the amount being saved will not be sufficient for many retirees, perhaps even a majority.
The fact that countries such as India have maintained a steady Gini coefficient throughout the last decade of rapid growth suggests that the particular growth model, rather than rapid growth itself, determines levels of inequality. Indeed, medium household income in the first decade of Chinese reform (1979–1989) rose at similar growth rates, but levels of inequality remained stable. It was only after state corporatism took hold in the mid-1990s that income inequality increased.
The link between suppressed household income and dangerous levels of income inequality, on the one hand, and the country’s state-dominated economy, on the other, is unmistakable. In a system where around 150,000 SOEs receive the lion’s share of capital and market opportunity at the expense of tens of millions of private corporate and informal firms, a small number of well-connected “insiders”—generally those with political connections or ties with the Communist Party or SOEs—benefit disproportionately from the current growth model.
That the Chinese model is geared toward a relatively small number of well-connected firms and individuals is reflected in numerous surveys. One such survey, conducted by the Beijing-based Horizon Research Consultancy Group in 2011, showed that nearly two-thirds of respondents (businesspeople in urban China) believed that knowing the right people with political connections was the primary factor in determining success or failure. A Business Week poll indicated “political connections” were overwhelmingly seen as the key to business success. It is no accident that more than 80 percent of the approximately eighty-five million CCP members make up the Chinese middle class and elite.