China Just Approved A New Plan To Crush Income Inequality

apDuring Hu Jintao's speech at the 18th Party Congress it was evident that the leaders were aware of growing public anger at the excesses of the Communist Party and the large income inequality.

He said at the time that China would aim to double its per capita income for rural and urban residents by 2020.

China has a Gini coefficient above 0.4 which is the level beyond which there is a risk of social unrest.

Now, China has approved its long-awaited income distribution plan (IDP). Here are some details from Bank of America's Ting Lu:

• "The IDP repeats a previous government goal to double household income in real term from 2010 to 2020, and to increase the ratio of household income to GDP and the ratio of labor income to national income. It says to raise minimum wage to 40% of urban average wage by 2015 in most parts of China and increase the ratio of collective bargaining to 80% in the private sector by 2015. The IDP also says to conduct study to introduce minimum wages at industry levels."
• "Containing [state-owned enterprises] will surely be the focus of the IDP. No aggressive detailed plans, but anyway the IDP vows to control total wage expenditure and wage level of high-income SOEs, cap compensation of senior executives, and introduce deferred pay and claw-back (learning from the Wall Street). Growth of pay of senior executives should be below that of employees. The IDP requires local SOEs to turn in more earnings to the government and central-govt SOEs to increase the percentage of their turned-in earnings by 5ppt in the 12th Five-year Plan (2011-15)."
• "The next point sounds not so good for those colossal state banks enjoying monopoly status. The IDP says to push forward interest rate liberalization reform by allowing banks to have more freedom to pay higher deposit rates. The IDP may also disappoint those shadow banking detractors as it encourages setting up debt and money market funds to compete with banks for deposits. To us economists, we believe these are good policies both redistribution and economic efficiency."
• "Unify the social security especially basic pension which is so far segmented at provincial, prefecture and even county levels. Increase the ratio of fiscal expenditure on social security and employment by 2ppt."
• "Reduce headcounts of central and local governments. Disclose all public expenditure before 2015. This is really good to hear, though we are concerned about implementation."
• "No more tax waiver for foreigners on personal income, dividend and capital gains obtained from foreign companies in China. Maybe that's not so good for some foreign companies in China."
• "Gradually expand property tax trials to more cities (beyond Shanghai and Chongqing). Conduct studies on introducing estate tax 'at an appropriate time'. Of course it’s very hard to define 'an appropriate time' and the precondition for estate tax is disclosure of assets, which might be quite difficult. The IDP says to cover a wider range of resources regarding resources tax and increase tax rates. It also plans to impose consumption tax on some high-expenditure entertainment and luxury goods. However, such new consumption tax might only make Macau and Hong Kong more favorable places for China’s new riches."
• "Improve and protect farmers’ user rights of land and allow farmers to transfer user rights of land. Better compensate farmers for land confiscation. Better protect rights of residential land. We believe the language here implies that the government might be prepared to give farmers closer-to-private-property rights on residential land."
• "To orderly push forward urbanizing migrant workers, especially young generation migrant workers. Promulgate transparent policies for rewarding hukou (urban residential permits). To expand urban basic public service to all urban residents including migrant workers."
• "To quicken the buildup of national health insurance. Increase the ratio of reimbursement to medical expenditure to 75% or above in both urban and rural areas. We believe that the govt has been doing very well in this regard in the past, and the 75% is achievable in the next five years."

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