Analysing Chinese Grey Income

"Analysing Chinese Grey Income was written by Wang Xiaolu, a senior scholar in the China Reform Foundation. The latter was originally set up by the government but probably now relies on private funding, like the money Credit Suisse would have paid for this report. This is Wang’s second income study and it finds something incredibly interesting. One of the puzzles in China is that consumption as a share of GDP is low and getting lower. But there’s a segment of consumption that’s doing incredibly well: luxury. When was the last time you went to Beijing or Shanghai? If you go today, you’ll see many more Porsches, Mercedes and BMWs than you saw six years ago. Maseratis are the latest fad. The streets of Beijing increasingly look like Moscow. And if you speak to luxury brands like Louis Vuitton or Prada, they may tell you that China is their fastest-growing market in terms of revenue. Clearly, there’s a huge amount of spending at the top end. But look at the official information and it’s not there. The top decile of household-income data appears to be growing at around the same pace as the lowest twenty per cent of households. There’s a creeping increase in inequality but it’s very slow and not much higher than, say, five years ago. So how do you explain the explosion of high-end cars and Louis Vuitton handbags? Wang concludes that the official data is completely wrong. Which, of course, everyone knew, even without the evidence. He did something very novel and somewhat questionable from a statistical perspective. Usually you do random samples in surveys. But when you’re trying to work out how much money rich people have made, you’re going to miss most of them because they represent a small minority of the population. Even the ones you sample are probably going to refuse an interview or give you false information, to hide their income from the tax authorities. So Wang hired a large number of researchers and asked them to go out and talk to as many of their own friends and family members as possible. Many of the researchers were students from Beijing or Qinghua universities and from reasonably wealthy families. They gathered information about income and consumption from some of the wealthiest households in China. Based on this information, Wang calculated that the official data missed 10 trillion renminbi of income in 2009. Moreover, that over 60 per cent of this ‘grey income’ went to the top ten per cent of households. This makes a lot of sense. Clearly, the official figures are completely off. Inequality in China is rising rapidly and most of the gains are going to the top ten per cent of households. That’s something everyone knows in their gut. And it explains the explosion of private jets, property speculators and luxury yachts. Politically, it’s not great. And not just in terms of the short-term legitimacy of the government, which is a big issue. There has also been a lot of politico-economic research done recently, notably by MIT economist Daron Acemoglu , showing that high levels of inequality are bad for the political development of a country. If there’s a small class of super-wealthy people, they are not going to want to democratise because it threatens their wealth – maybe they’ll be taxed more. So they’ll spend resources to protect the dictatorship. And even if there’s democratisation one day, inequality may lead to corruption and an undermining of the democratic process. In addition, if a wealthy elite dominates public policy, it won’t care about the welfare of the bottom 90 per cent of the population. Obviously, some inequality is good for economic growth because you need to give benefits to smart and creative people. But there’s also evidence that, above a certain threshold, it actually becomes a bad thing for economic growth. That’s also something China will have to worry about in the future."