The Rise of China's Top-10%
A by-product of China’s rapid economic rise is that income and wealth have become increasingly concentrated among the top-10% of the population. Recent research shows that over a very short timespan, only about 20 years, China went from having distributions of income and wealth comparable to some European countries to distributions that resemble the United States. The number of high-net-wealth individuals rose eight-fold in one decade. These secular trends are important for the world economy. And, as Canada’s gateway to Asia, they matter to British Columbia given their impact on flows of trade and private wealth.
China’s Economic Acceleration
China liberalized its economy following the 1978 Third Plenary Session of the 11th Central Committee of the Communist Party under Deng Xiaoping. The production-side of the country’s economy was reformed through de-monopolization, increased competition, allowing companies to retain profits and set their own prices and wages, the entry of foreign capital, the reopening of the Shanghai stock market in 1990, and China’s entry into the World Trade Organization in 2001. The household sector was transformed through price and wage liberalization and by dramatic housing reform. In 1998, China abolished its employer-based public housing system and moved to a private market for housing structures (Chen et al. 2016).[1]
Together, these reforms engendered industrialization and massive increases in (multi-factor) productivity (Cheremukhin et al., 2015). The rate of growth in real national income per adult during 1998-2015 was 8.1% per annum, almost double the rate seen during 1978-1998 (Figure 1, Piketty et al. 2017). China’s share of world GDP increased from 3% to 20% over 1978-2015, even as its share of world population trended down (Figure 2).[2]
Figure 1: Real Income Per Adult Population Accelerated Sharply
Source: Picketty et al. (2017).
Figure 2: China's Share of World GDP Increased Significantly after 2000
Source: Picketty et al. (2017).
High-Income Persons Earn an Increasing Share of National Income
A recent study provides new insights on these transformations: economic gains are increasingly concentrated among a small segment of the population (Piketty et al. 2017a). In 1978, the top-10% and the bottom-50% of income-earners each earned a little over one-quarter of national income. However, by 2015, the share earned by the former group had risen from 27% to 41% and the share earned by the latter group had dropped from 27% to 15% (Figure 3).[3]
Figure 3: Over a Short Timespan, China's Income Distribution Became Significantly
Skewed Toward the Top-10% and Away From the Bottom-50%
Source: Picketty et al. (2017).
The polarization of the Chinese income distribution echoes similar trends in the US and some other advanced economies. The top-10% of US income-earners accounted for just under 50% of national income in 2015, modestly more than in China (Figure 4). The bottom-50% of US income earners received just over 12% of national income, slightly less than in China (Figure 5). By comparison, in European countries such as France, the income distribution is more even and has remained relatively more stable over recent decades.
Figure 4: China's Top-10% Income Share Approaches US Levels
Source: Picketty et al. (2017).
Figure 5: Bottom-50% Income Share -- China vs US and France
Source: Picketty et al. (2017).
High Income-Earners in China Have Seen Faster Income Growth
Over 1978-2015, income growth for the top-10% of the Chinese income distribution was 7.4% per annum compared to 4.5% per annum for the bottom-50% (Figure 6). The top-1% and top-0.001% of the distribution saw even faster income growth rates. By comparison, US households saw slower but more uneven rates of growth. The bottom-50% of American households saw zero real income growth across 1978-2015, compared to gains of 2.1% per annum for the top-10%.
Figure 6: Top Income Earners See Much Faster Income Growth Than The Rest,
Especially in China and the US
Source: Picketty et al. (2017).
Cumulatively, real incomes for the top-10% of income-earners in China increased 1,300% over 1978-2015. And gains were roughly three times larger (3,800%) for the top-0.001% (Figure 7). The bottom-50% saw much more modest real income gains of 400%, but still did better than their American counterparts who made no gains at all. Piketty et al. (2017b) conclude that “For the time being, China’s development model appears to be more egalitarian than that of the United States, but less so than those in European countries.”
Figure 7: Chinese and US Income Growth is Strongly Skewed Toward the Top of the Income Distribution
(cumulative real income growth %, 1978-2015)
Source: Picketty et al. (2017).
The Top-10% of China’s Wealth Distribution Now Own the Majority of Household Assets
The distribution of household wealth in China has also become significantly more uneven. Zeng and Ott (2017) estimate that the number of Chinese high-net-worth individuals (HNWIs, defined as an individual with more than USD 1.5 million in investable assets) has increased eight-fold over a decade, climbing from around 180,000 in 2006 to 1.6 million in 2016. Incredibly, this represents an average growth rate of 24% percent per annum.
Whereas in 1995 the top-10% of the wealth distribution owned two-fifths of all household wealth in China, they now own two-thirds (Piketty et al. 2017a). The rest of China’s wealth distribution –- the middle-40% of households and the bottom-50% of households –- have seen sharp decreases in their relative share of household wealth (Figure 7).
Conclusion
China’s ongoing economic development continues to have profound implications for the world economy -- and, as Canada’s Asian gateway, for British Columbia.[4] For example, it took only 20 years for China to displace the US, Japan and Germany as the world’s leading manufacturing nation. Private ownership of housing structures in China only became fully-permitted in 1998, yet buyers from China are now the preeminent international purchasers in many real estate markets across the world.[5]
Piketty et al. (2017a) shed new light on these secular trends. Chinese income and wealth are increasingly concentrated among a small segment of the population. In 2015, the top-10% of the population earned 41% of national income and owned 67% of household wealth. Chinese economic prosperity has thus followed a path that is producing income and wealth distributions that look more like those in the United States than in many European countries. It is remarkable that these shifts have happened within the space of only about 20 years.
References
Chen, B., Yang, X. and N. Zhong. 2016. “Urban Housing Privatization and Household Saving in China.” Paper presented at the American Economic Association 2017 Annual Meeting, Chicago, January 6-8.
Cheremukhin, A., Golosov, M., Guriev, S. and A. Tsyvinski. 2015. “The Economy of People's Republic of China from 1953.” National Bureau of Economic Research. NBER Working Paper no. 21397.
International Monetary Fund. 2018. World Economic Outlook (April 2018). Washington D.C.
National Association of Realtors. 2017. “2017 Profile of International Activity in U.S. Residential Real Estate.” National Association of Realtors Research Division.
Piketty, T., Yang, L. and G. Zucman. 2017a. “Capital Accumulation, Private Property and Inequality in China, 1978-2015.” National Bureau of Economic Research, NBER Working Paper no. 23368.
Piketty, T., Yang, L. and G. Zucman. 2017b. “Capital Accumulation, Private Property and Inequality in China, 1978-2015.” Centre for Economic Policy Research, VoxEU Blog, 20 July.
Zeng, J. and J. Ott. 2017. “China’s Private Wealth Machine.” Insights, Bain & Company, July 25.
Zhang, L. 2015. “Chinese Law on Private Ownership of Real Property.” US Library of Congress.
[1] Note that all urban land in China remains owned by the State. Agricultural land is owned by the State or by collectives. The housing reforms permitted individual private ownership of housing structures and, for a fee, the acquisition of transferable residential land-use rights for up to 70 years. See Zhang (2015).
[2] GDP based on purchasing power parity (International Monetary Fund 2018).
[3] The share of income earned by urban households has also increased from just 30% in 1978 to 80% in 2015. Urban households earned 3.5-times more than their rural counterparts in 2015, compared to 2-times more in 1978.
[4] China is Canada’s second largest trading partner, buying roughly $28 billion of Canada’s exports. China accounts for roughly 5% of Canada’s goods exports (second behind the US) and 3% of services exports (third behind the US and UK).
[5] For example, Chinese buyers bought USD 31.7 billion (40,572 properties) worth of US residential real estate in 2017, up 183% from 2010. More than a third of these purchases, 37%, occurred in California. Prior to 2013, Canadians (who tend to buy in Florida and Arizona) were the most common international buyers of US real estate. See National Association of Realtors (2017).