An article at Caixin helps clear up a mystery that has plagued Western observers, including some readers of this blog: where is all the money that is stoking Chinese real estate speculation coming from? Accounts of individuals buying 3 or 5 apartments at prices way out of line with incomes with little in the way of leverage, then keeping them vacant, seems inconceivable on the scale at which it appears to be taking place.
It appears that the richest cohort is more affluent that official data suggests, largely due to the fact that black economy is quite large and the top group is a disproportionate beneficiary. As Caixin tells us (via MarketWatch):
Official statistics in 2008 said China’s annual per capita income was less than 16,000 yuan ($2,363). Households with the highest incomes accounted for 10% of the total population, with these annual disposable incomes averaging less than 44,000 yuan…
It is difficult for one to reconcile such low income with the feverish property market and rising property prices reported across the country in recent years….An independent survey conducted by our institute concluded that the actual annual disposable income for the top 10% of all Chinese households with the highest incomes in 2008 was 139,000 yuan — more than three times the official estimate…
According to our calculations, income earned on the side by that 10% comprising the highest-income families accounts for 63% of total invisible income among urban residents, while the 20% of households in the relatively high-income bracket own more than 80% of total, urban invisible income…
The gap between the highest-income and lowest-income families in urban areas is an astounding 26-fold, while the official data sets it at nine-fold. Income for highest-income families is 65 times that of families at the lowest income levels in both urban and rural areas, in sharp contrast to the 23-fold difference cited in the official report….
Shadow income is growing faster than GDP. This conclusion is supported by macro statistics. And it has become the gravest element, jeopardizing social stability and posing the most serious threat to China’s future.
The high concentration of income at the top also helps explain China’s low and falling consumption levels. As Michael Pettis commented earlier this week:
As I have discussed before, in order to rebalance the economy China must sharply raise the consumption share of GDP. It has declined from 46% of GDP in 2000, which was already a very low number, although not quite unprecedented, to 41% in 2003, which is, I believe, an unprecedented number, at least for any large economy.
But that wasn’t the end of the story. Consumption declined further as a share of GDP to an astonishing 38% in 2006, finally to end under 36% in 2009. I don’t think we have ever seen anything close to this level before.
Policymakers are very aware of how urgent it is to reverse this decline…. Li Keqiang, widely believed to be the anointed premier after 2012, recently made just this point, according to an article Thursday in Bloomberg:
China’s past development has created an “irrational economic structure” and “uncoordinated and unsustainable development is increasingly apparent,” said Vice Premier Li Keqiang in a June article in the government-owned Qiu Shi magazine. Long-term dependence on investment and exports for growth “will grow the instability of the economy,” he said.
Pettis argues that the small consumption share is due to how much of national income is controlled by the government (as in the private sector isn’t big enough to have consumption be all that large relative to GDP). But if (as some argue) policies steer households away from consumption, and that is exacerbated by the operation of the black economy (apartments are a better place to stash cash than a mattress in an economy with a decent level of inflation), the concentration of income at the top may be a contributing factor.