Hidden Income in China Boosts Income of Top 10%, Fueling Speculation, Social Strains

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.

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  1. charles 2

    How much of this hidden income is dependent of the investment bubble ? The salient point in the Market Watch article is the definition :

    “Shadow income is derived mainly through corruption and rent-seeking activities tied to the distribution of public wealth and resources by public authorities, infringements of public assets and the earnings of others, as well as the inappropriate distribution of manipulative revenue.”

    Did you say “wealth effect on unrealized gains” ?

    1. Yves Smith Post author

      Yes, it appears to be the mechanism for getting funds from infrastructure and investment spending gets into specific private hands. Then a lot of them put it into the bank of real estate.

      I hesitated to quote the section you highlighted. It is likely accurate, but the mechanisms for corruption (which is what this amounts to) are usually not well known unless the conduct is blatant and widespread. That may actually be the case, and it is still being kept from outsiders, but the more general point is it is hard to know what is going on in a cash economy, and therefore to speculate how much is merely tax evasion v. more extreme forms of misconduct.

      1. aet

        Gibbon once wrote that the existence of corruption is the infallible symptom of constitutional liberty.
        In a true totalitarian or despotic state, fear prevents corruption.
        So Chinese people must be gaining in liberty, at any rate.

        1. aet

          Despots and tyrants are not ‘corrupt”: they simly take, without pretense.
          And what happens if you come close to a big mean dog’s dinner while it’s eating?
          A corrupt official in a despotic state is eating fromthe big dog’s bowl….

        2. Ming

          Gibbons statement does not reflect reality. Many African despot nation were anything but nations with ‘constitutional liberties’, nonetheless, anything could be achieved if you paid the right person,
          irrespective of any laws or rights that were supposed to be up held
          for the ordinary person.

  2. purple

    Doubtful that the consumption share has much to do with inequality. Otherwise Latin America would have a low consumption share, and the U.S. (as compared with Germany, for instance). It’s more too do with heavy investment, often not a bad thing, and orientation to export industries/suppressed currency. Low consumption shares are mostly a phenomenon of East Asia. While it may not work forever and is probably globally unsustainable (i.e its OK if a small country Taiwan does it for a while, but not for the PRC), they have generally coincided with rapid growth rates and soild income gains. It should be noted that China had a much ‘healthier’ consumption share when it was one of the poorest countries in the world. However, inequality and elite arrogance has historically been China’s downfall, they had better watch it, because the working class/peasants are not afraid of militancy.

    1. Ignacio

      Not so doubtful, i think. To refrain consumption in a growing economy you just have to divert incomes for investment. If part of these investents go to real estate, fueling a housing bubble, it is not difficult to see that is creating inequality.

    2. MyLessThanPrimeBeef

      However, inequality and elite arrogance has historically been China’s downfall, they had better watch it, because the working class/peasants are not afraid of militancy.


      Purple, don’t forget ethnic tension.

      In Tang China, one of the two great dyansties in Chinese history, Xian, her capital, was frequently over-run by Sogdians and other tribes from the west.

      And the Mongols put the Han Chinese in the lowest caste and employed Muslim Arabs as the sole tax collectors. That’s why you see all those beautiful blue and white porcelains in Istanbul.

      1. aet

        Inequality and elite arrogance brought on the american revolution and the civil war…working-class militancy has been common throughout American..and i well remeber the race riots in America in the 1960s, and sporadically afterwards, and attacks on boat people and illegal immigrants, both physical and actual seem like eveidence of ethnic or racial tensions.

        I’m not worried about China, and China’s not worried about me.

  3. Ignacio

    According to Michel Pettis, whose paper you cited is really great, the government is using household deposits, borrowed at too low rates to promote (over)investment. It could well be that part of that money is somehow channeled to real-estate investment

  4. Art Eclectic

    “largely due to the fact that black economy is quite large and the top group is a disproportionate beneficiary.”

    No matter what the economic system, the top group always prospers. The golden rule is universal.

  5. rjs

    its not all real estate:

    China Auto Sales May Rise to 16 Million, Group Says (compare US 11 million)


    GM has been selling more buicks in china than the US since 2007…

    According to the strategic plan for highway development in 2005,by 2020, China will establish a national highway network, totaling 100,000 kilometers, about the length in the United States today.


  6. Lao Wai

    Xian was not the capital during the Tang Dynasty. During the Tang dynasty the capital was first Taiyuan then Beijing.

    Lao Wai

    (lone american oracle warring against Ignorance.)

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