Cutting income gaps key priority in seeking common prosperity

Achieving common prosperity will be a very long-term task. For example, as it has been noted in proposals for formulating the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 adopted at the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China, "the middle-income group will be significantly expanded, basic public services will be equalized, and the gap between urban and rural development and the gap in living standards of residents will be significantly reduced".

Now it is necessary to prevent household income gaps from further widening. I believe we can determine reasons for the widening income gap from certain long-term economic indicators, and find ways to further narrow the gap.

Currently, there are two ways of calculating the proportion of household income to the country's GDP.

Taking both methods, income gaps across different income groups are still quite significant. Measured by the Gini coefficient, an indicator reflecting the income gap among China's households, it can be noted that the Gini coefficient has been on the rise since the late 1990s. Though there has been a slight downward trend, it is still at a relatively high position of 0.46. This level is still notably higher compared with Japan's 0.35.

Therefore, efforts must be made to study the actual income levels of residents in different income groups. Our goal for common prosperity must be based on the premise of real and reliable data.

China's low consumption rate is one thing to take into consideration. Household consumption rates in China are much lower than the global average. For example, in 2019, the consumption rate of Chinese residents and households came in at just 39 percent. The household consumption rate was 60 percent in India and 68 percent in Vietnam.

Compared with major economies, the consumption rate in China is visibly low, indicating that the country's savings rate is high. In 2017, China's national savings rate was 47 percent, much higher than the world's average savings rate of 26.5 percent, and much higher than the average level of developing economies and developed countries. The high savings rate means that the scale of investment is large while the consumption scale is relatively small.

One of the peaks of China's household savings rate appeared in 2010, a period of time that was also good for real estate investment when the sector delivered robust growth. That time was also the low point for household consumption rates, which fell to 34.63 percent. Ever since 2010, China's GDP growth rate has declined for 10 consecutive years.

The continuous 20-year robust market in real estate has continuously widened the income gap. This is also the main reason for the widening income gap over the past two decades.

Therefore, it is necessary to reflect on real estate policies of the past. The principle of "houses are for living in, not for speculation "should be continuously adhered to.

The key reason behind China's low consumption rate, in addition to the two more traditional ones of Chinese people's frugality and a preference for investment, is the large income gap among residents. Therefore, increasing income growth for low and middle-income groups will be conducive to consumption.

The National Bureau of Statistics said that disposable incomes of the high-income group of Chinese households has increased by 35 percent over the past five years, while that of middle-income groups increased by only 25 percent. In the first half, though national per capita disposable incomes increased by 12.6 percent year-on-year on nominal terms, those of median income groups increased only 11.4 percent. The income gap of households is still widening.

There are two ways to increase the incomes of low and middle-income groups and increase the proportion of the middle-income group. One is to enlarge the economic pie. The other is to help them have a bigger proportion of the economic pie. The former relies on economic development to increase income, which is what we call primary distribution. The latter refers to secondary distribution, or redistribution, such as transfer payments. As a matter of fact, in recent years, China has been using both methods.

While noting the importance of tertiary distribution, we should also be aware that primary distribution is still the most basic source of reasonable arrangements for income distribution and narrowing the income gap.

Efforts are needed on a number of fronts. For example, in 2020, the profits of 38 A-share listed banks in China accounted for 42 percent of the country's A-share listed companies. Does such an industry profit pattern formed by primary distribution also need to be changed? In fact, some industries in China are faced with a situation where a small number of companies have very high market shares, which is one of the root causes of the widening income gap.

In February, the State Council, China's Cabinet, issued a guideline on antimonopoly measures for the platform economy. This can be seen as an effort toward ensuring fairness in primary distribution.

Regarding secondary distribution, more efforts can be made in refining the taxation system. Feasible plans need to be made to properly levy taxes on high-income groups. Also, a long-term security and guarantee mechanism for low-income groups will be formulated.

The writer is chief economist at Zhongtai Securities.

The views don't necessarily reflect those of China Daily.