Chinese Income Gap – Problem?

If you spend any amount of time in any of China’s cities, it will not take long to notice that there are MANY WEALTHY PEOPLE and MORE POOR PEOPLE. China obviously has a massive population – so you get a chance to see more people in a short period of time that almost anywhere else.

Western strategists continually write about Rural vs Urban China, often writing about these in terms of Rich vs Poor China. Then they equate the current rural condition with Mao’s peasant led rebellion that founded the People’s Republic of China back in 1949.

For whatever reason, pundits are always looking at the LAST PROBLEM, and when they don’t have a deep understanding of the situation, pundits like to make analogies to Chinese history.

I have two contentions:

  1. WE FOCUS ON THE WRONG GAP: China does have a rich poor gap that must be improved – but it’s not the rural/urban or even the rich/poor gap. It’s the middle class/rich gap.
  2. CHINESE HISTORY ISN’T SPECIAL: China’s history is almost meaningless in trying to understand modern China. What’s happening on the ground today in China has as little in common with the Mao era as the Civil War does with modern America.

Today there was an article in StratFor (Strategic Forecasting) that focuses on the gap between China’s rich and poor. The article is titled: China Political Memo: A Growing Gap Between the People and the Elite.

A recent survey conducted at several top universities in China, including Peking University (PKU) and Tsinghua University, shows that the percentage of rural students enrolled at those institutions has dramatically declined over the past two decades. At PKU the percentage dropped from more than 30 percent in the 1990s to about 10 percent today. The numbers are similar at Tsinghua and other more selective Chinese universities. The most obvious reasons for this decline include China’s rapid rate of urbanization and the increasing number of job opportunities available to the rural population. Still, the decline is a worrisome sign that opportunities for China’s rural population to attain higher social status may be narrowing. The survey findings also reinforce an already evident trend: that social mobility in China is not as fluid as the country’s economic development might suggest.

Good. We’re focused on social mobility. Educational institutions are a big part of social mobility – especially access to the most elite institutions.

You can read the original China Daily article: Rural Students Deserve Better.

The rural Chinese population has been experiencing severe brain-drain for the last 30 years. In 1982, China was 20% urban, and only 26% urban by 1990. Today, China is over 50% urban. By 2035, it’s expected to be 70% urban.

Based on the numbers given in 1990 and today – the admission numbers should probably be closer to 15%. But that’s without factoring in the “brain drain” that has already happened in the country side. The smartest, the most ambitious, the most motivated have long since left this pre-industrial farming communities, and the ones that are born onto these farms try to get out as fast as possible.

So – it’s not a black and white issue – from an efficiency standpoint – to say that more farm students should be enrolled then are already being enrolled.

On the other hand, unrelated changes such as improving the legal system, tax system, and real estate market would probably do more to strengthen the country. How much does the unreliable legal system do to keep people from working with those outside of their network?

In any society, even an ideal one, social stratification is inevitable. But for a modern society to prosper and grow it must minimize barriers to economic advancement. Otherwise, gaps will widen among the social strata, creating potential resentment and instability at the lower levels. In China, the traditional path to a better life was the imperial examination system (ke ju), which began in the 7th century during the Sui dynasty and was open to anyone who demonstrated sufficient intelligence and drive, regardless of social status. Ke ju selected the most promising administrators for the state bureaucracy. As such, it served for centuries as a portal through which smart and hard-working youth could become part of China’s political class. This transformation could greatly change the life not only of the individual aspirant, but also his entire family. Cancellation of the imperial examination system in 1905, during the Qing dynasty, cut off this mode of access. In the 1950s, the division between the people and the ruling elite was reinforced with the introduction of the hukou system, a resident-identification program that created an official division between rural and urban dwellers.

This is a typical example of bias #2 – Chinese History isn’t special. What does the “imperial examination system” have to do with modern China? The exams could be taken by male adults, and the last exam was given in 1905 – meaning that the test taker had to be born before 1890. The imperial exams were a test. “Gaokao” was a test. The SAT is also a test. Why would we assume that “Gaokao” has more connection to the imperial exams than it does to the SAT?

The biggest beneficiaries of the system have been urban dwellers, who have greater access to employment, social welfare, education, medical care and housing than their rural counterparts. Despite years of campaigning by the state for hukou reform and a more equitable distribution of benefits, little has been achieved. If anything the disparity seems to be widening, which makes the findings of the recent university survey all the more troubling.

Of course the industrialized (ie. urban dwellers) are the beneficiaries of modern China – because they are more productive in the urban environment. Their farming jobs are easily replaced with the capital equipment used on American farms – equipment that allows 1% of Americans to work in agriculture.

One of the few portals left for upwardly mobile youth in China is the college entrance examinations (known as gao kao). The gao kao system is intensely competitive, allowing qualified applicants regardless of pedigree an opportunity to enter a university (usually in an urban area), earn a degree and find a well-paying job. While the system falls short in many ways — stipulating, for example, lower quotas for rural applicants than their urban counterparts and thereby further widening the gap — it remains the most efficient path toward the elite class, both politically and economically. And this, much like the imperial examinations once did, helps to anchor stability and, to some extent, secures the power of the elite class. While an expanding educational system was once seen as a great leveler of modern China, a growing imbalance in the distribution of resources between the country’s rising middle class and their less privileged rural counterparts is making it harder for rural youth to move upward. College tuition and fees are becoming less affordable. Many of the top universities choose students based on their acquired specialties — for example, music or technology — which wealthy students are better able to develop. This hurts rural students, who are more likely to have attained high scores through hard work. Meanwhile, many selections are based on personal networks, which further impedes poor students. The result is a narrowing of options for rural youth, the brightest of whom may not have enough money or the right connections to get into the top schools. Barriers are also being raised by the increasingly close connections between China’s political elite and business elite, both urban based. As it becomes harder for China’s rural population to break through these barriers, it could lead to growing grievances over inequality and intensifying social unrest — Beijing’s greatest fear. Therefore, Beijing may need to work to increase access, creating opportunities for the country’s massive rural population.

Yes, it’s sad anytime someone is under-utilized. In 1982, 75% of Mainland Chinese were subsistence farmers. Today it’s less than 50%. Seems reasonable to believe that the 50% that are still subsistence farmers are probably not much better off than they were in 1982 – because they are no more productive than they were in 1982. However, if they want, then can go get a job in an urban area. They can work in the factory, and their kids can get a shot at really integrating into that urban area. Unless the government makes a mess of inflation – there was 100% inflation leading up to the 1989/6/4 incident – the farmers will be fine. They know their future awaits them in the city when their time comes. If not them personally, their children or grandchildren.

The bigger problem is that the wealthy/elite are very entrenched, and getting more entrenched by the second. The far more interesting survey for Tsinghua and PKU would be: what is your parents net worth? or what bureaucracy do your parents run?Knowing how relationships and favors work throughout China, I would be very pleasantly surprised if these numbers were anything like a representative (meritocratic) representation of urban China.

The Chinese Middle class has average incomes around $10,000 USD/year. Meanwhile, China has more than 1.11 MILLION households with net worth over $1,000,000 USD. Houses in most urban areas of China can not be purchased by the “middle class” with the current middle class income:home price ratio.

It’s not the barrier between the poor and the middle class that China needs to worry about – this is a barrier that the motivated can easily overcome. It’s the barrier between middle class and wealthy that they need to worry about — because the smart, ambitious, but frustrated — those are the ones you’ve got to worry about.

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