First Insights: China: Government announces reform plan to improve income distribution

First Insights: China: Government announces reform plan to improve income distribution

The Chinese government announced its plan to reform income distribution today. This is an important reform plan which has been debated by the government for many years. Our comments:

1. The plan suggests the government puts more weight on income growth than on income distribution. The objective section starts by reiterating the ambitious target President Hu announced in November 2012 to “double per capita income” between 2010 and 2020. The plan does not set an explicit target on income distribution such as a Gini coefficient. Instead, it offers only a qualitative objective to “reduce population in poverty and increase size of middle class”. This probably reflects the difficulty the government expects to have in reducing income inequality and the strong resistance from vested interest groups.

2. The plan presents many general policy guidelines and some specific policy measures. At first glance, we think the following measures may have a meaningful impact:
· Raising minimum wages in most areas to 40% of the local average wage level by 2015.
· In state-owned enterprises (SOE), put cap on compensation for senior management, push for deferred compensation and clawback clauses for management, and impose a rule that management income growth should be slower than average staff income growth.
· Promote interest rate liberalization, make the deposit and lending rates more flexible.
· SOEs shall submit 5% more of their profits to the government.
· Strengthen income tax collection for high income individuals. Abolish exemption for foreign individuals’ personal income tax from their FDI dividends in China.
· Expand pilot program for property tax. Conduct research into the issue of introducing inheritance tax at the appropriate time.
· Impose a consumption tax on high-end service consumption and luxury goods.

3. In the past we have witnessed cases where the central government has announced reform plans but implementation was not effective. It remains to be seen how soon and how seriously these measures will be implemented.

Economists
Zhiwei Zhang