Zhang Monan

China needs a wealth distribution revolution

By Zhang Monan (China Daily)
Updated: 2010-01-21 07:52

The global economic crisis has forcefully compelled China to adjust its industrial structure and hasten the pace of reform this year.

President Hu Jintao recently and clearly suggested that the nation further adjust its national income distribution. China has responded, initiating broad reforms of how income is spread among the population.

Thirty years of booming economic development has created mounting national wealth. But uneven wealth distribution not only creates imbalances in the nation's economic structure and in international and domestic demands, but it also weakens domestic demand, one of the most important factors for sustainable development in the Chinese economy.

The difficulty in boosting domestic demand is directly related to irrational primary and secondary distribution structures.

In primary distribution, there are three "lows". Labor income is low in proportion to gross national income. Wage accounts for a lower portion of the national income and labor elements still take a low share in distribution of enterprises.

As for secondary distribution, operation capital income of State-owned enterprises cannot trickle down to residents, aggravating the secondary distribution's "reverse adjustment" of resident income. All these factors will cause the national income growth to lag, in comparison with national income accumulation and the continuous drop of spending proportionate to the gross domestic product.

China needs a wealth distribution revolution, based on principles of "giving priority to efficiency and due consideration to fairness, and sharing common fruits and promoting harmony". The institutional restriction of "encouraging production and restraining consumption" should be revamped and a system of "multiple distribution methods" should be established.

In reforming the redistribution system in China, solutions should be created in several directions. First, we should improve the level of social security work and public service. Second, further reform should be expanded to reforms of the tax system and the payment system of wages, insurance and benefits. Third, regulate the distributive relations among governments, enterprises and individuals and direct more national income to individual levels through policies.

Fourth, fine-tune the proportion between capital income and labor income and increase labor income's share in the primary distribution of national income.

Fifth, enlarge the scale and proportion of dividend sharing of State-owned enterprises to fill the gap between operation capital income of enterprises and residents.

Sixth, adjust the binary income distribution pattern of urban and rural areas.

Seventh, promote reforms of monopoly industries, introduce more competition, and regulate the profit margin of monopoly tycoons through price controls and levies.

Eighth, perfect the security of property income growth and encourage residents to expect long-term income. Lastly, reduce tax burdens for some groups of people, and raise the tax threshold to guarantee a national tax income by implementing proper policies.

Financial crisis has proved to be the turning point for China to divert its economic growth engine that is export-oriented to one that is dependent on domestic demand.

The author is an economics researcher with the State Information Center.

(China Daily 01/21/2010 page8)