Need to narrow income gap

Obviously, the system of fair distribution according to performance should further reflect the labor value in the market, but getting "the first income distribution" right is more important because if there is something wrong with the first distribution, it is very hard to correct it through a second one.

The financial system must play a role in narrowing the income gap. Gradual liberalization of interest rates could be a better way to raise deposit rates, thus preserving households' purchasing power in inflationary periods. Meanwhile, raising the lending rates might be helpful in curbing investment and transferring wealth from producers to households.

Given the current tightening liquidity environment, Chinese banks are starved for funds and are intensifying the competition for deposits through exploring innovative ways to deliver wealth management products for high-value customers. As a result, wealthy individuals and companies are the largest beneficiaries of the banking system.

Considering the importance of employment created by small-and-medium-sized enterprises, Chinese banks should be developed on a more balanced, coordinated base, making microfinance more accessible to both small businesses and average citizens to improve employment and increase household incomes.

For decades, a widening income gap has been one of the problems faced by those countries stuck in the "Middle Income Trap" both in Latin-America and Asia. Only a few countries such as Japan, South Korea and Singapore, have successfully avoided the trap. China faces a similar situation despite its characteristics of a large population and fast-growing urbanization, and will not maintain long-term sustainable growth without closing the gap between the haves and have-nots.

This is not only an economic issue, it is also closely related to political theory and social stability. Paul Collier, an Oxford University economist, examined data from nearly every country going back to 1960. He found that above a certain income threshold, democratic countries become less prone to unrest as they get richer, whilst autocracies tend to suffer higher levels of unrest.

Usually, reforms in countries entering the middle-income development phase are fettered by specific interests groups, which leads to rent seeking, speculation and corruption. Therefore, it is necessary for policymakers to contemplate a set of top-to-bottom steps on the road to reform.

Rebalancing an economy is never an easy process, since it requires both a strong stomach for reform and also a suitably cautious approach, combined with a true sense of the moment.

The author is chairman of Board of Directors, Bank of China.

(China Daily 09/16/2011 page8)