China Tackles Income Divide

jamesmith

From today's Journal.

announced by the State Council yesterday, with focus on China's SOEs.  This provides the first look of potential new policies that are likely to be implemented under China's 5th generation leadership.



source: http://online.wsj.com/article/SB ... 85592964530314.html

China Tackles Income Divide

BEIJINGChina unveiled sweeping policy guidelines to narrow the growing gap between rich and poor, vowing to turn over more of the profits of state-owned companies to pay for ambitious welfare programs and to take other steps to root out corruption and provide for the needy.

In a policy statement filled with populist rhetoric about the need for greater equality, China's State Council, or cabinet, pledged to boost the social safety net and then took aim at the nation's powerful state corporations, effectively warning them they would have to shoulder some of that extra cost.

"Narrowing the income gap is essential for ensuring social justice and social harmony," the State Council said in a statement posted on the central government website on Tuesday. "We need to raise income levels of the poor and adjust taxes on the excessively wealthy," it said.

In its most specific step, the State Council's new guidelines call for state companies to hand over an additional 5% or so of their profits to the government by 2015. According to the Peterson Institute for International Economics, Chinese central state-owned enterprises earned more than one trillion yuan, or $160 billion, in net profits in 2011, but only 82.3 billion yuan was paid out in dividends,

Many of the State Council's other guidelines offered few specifics or timelines, and it remains unclear whether they will result in concrete action. Implementation of any plan is the crucial element, Chinese and foreign economists have argued. For instance, the guidelines call for extending property taxes nationally; at the moment, property taxes have been confined to a few cities and involve very low rates. But they offer a guidepost for other government officials and represent a nod by China's new leadership under Xi Jinping that it faces pressure to address nagging social issues such as a yawning income gap and the need for a general boost in living standards. Mr. Xi was named Communist Party chief in November and is set to be named president in March.

Nicholas Borst, a China researcher at the Peterson Institute said, "Implementation very well might get bogged down by vested interest and the conservative old guard. It does not, however, appear that [the new leaders] will be waiting a year to begin making reforms."

Economists have long been urging Beijing to compel state companies to hand over more of their profits to the central government as a way to help pay for increased spending on pensions, health care, low-income housing and education. A stronger social safety net is seen as crucial to China's economic rebalancing, freeing up household income for consumption.

The State Council said the personal income tax would be adjusted to capture more of the income from the nation's well-to-do. While no new tax rates were announced, the guidelines pointed to the need to bring "all sources of income" under the tax system.

The nation's corporate tycoons and some of its government officials have been able to amass fortunes that often evade the government's tax net. The State Council also suggested it might take aim at some of the most sensitive areas of wealth accumulation by taxing inheritance and real estate. Authorities will also step up efforts to track and control illegal income, including from government officials. It vowed tough action in cases of false reporting of assets, noting a rising problem with hidden wealth.

Official corruption has gained widespread attention in the domestic media. A number of government officials have been stripped of their posts for corruption and abuse of power, most notably former party high-flier Bo Xilai. Despite the Bo case, most of the efforts have targeted relatively low-level officials and it remains unclear whether any of the efforts would target the upper echelons of the party leadership.

"We need to strictly enforce rules on accurate reporting of income, property and investment by all levels of officials," it said, adding that information on the employment of officials' spouses and children would all be watched more closely.

For the first time in years, the National Bureau of Statistics last month disclosed China's Gini coefficient—a key measure of inequality named after an Italian statistician. The figure came in at a relatively high 0.47 in 2012. While some experts maintain that number still underestimates the nation's inequality, it would make the division of income as unequal as in the U.S., which had a Gini coefficient of 0.48 in 2011, according to the U.S. Census Bureau. A coefficient of 1 indicates perfect inequality, while a coefficient of zero indicates perfect equality.

The State Council said the government also plans more active policies to boost employment and it will press for a "reasonable" rise in wages for low-income workers.

China will also push ahead with an easing of restrictions on interest rates on loans and deposits. The aim of this move appears to be to increase interest income for depositors under the state-dominated banking system, where the central bank sets guidelines for interest-rate levels. China's state banks have long been accused of benefiting from low deposit rates, which helps to inflate their profits.

Economists have long argued that China needs to encourage more domestic consumption to shift its economy away from relying on government investment and exports for growth. New sources of income—such as from bank deposits and higher wages—would allow people to spend more, they say.

The State Council also said it would strictly regulate bank fees. Banks have been widely criticized for charging too much for some of their services.

The statement also called for long-term efforts to boost farm income. It said Beijing needs to protect farmers' interests by ensuring they receive more income from the sale of farm land.

Disputes over expropriated farm land have become a serious threat to social stability. Local officials, often working hand in glove with property companies, frequently seize farm land for development projects but with little or no compensation for farmers.

The State Council also promised to make it easier for farmers to move to the cities. A household registration regulation known as the "hukou" system, currently makes it difficult for people from the countryside to live permanently in the cities with the same benefits from education and health care as other urban residents.

The State Council also pointed to a big wealth gap between the urban and rural regions and vowed to provide more fiscal support for the less developed central and western regions of the country.

—Liyan Qi and William Kazer

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