Will China’s 12th Five Year Plan Reduce the Income Gap?

May 11, 2011 Posted by China Briefing Reading Time: 3 minutes

By Jennifer Park

May 11 – In a rural village in Shandong Province, a middle-age woman earns a daily wage of 40RMB (US$6) from her potato field. It may not seem like much, but still it is twice as much as what she was earning three years ago, according to Reuters. This is a common scenario in China’s rural areas, where more than half of China’s population resides.

The same country is also experiencing one of the fastest sustained economic growth rates in the world. As a result, China now boasts more than 130 U.S. dollar billionaires and the country is expected to become home to the fourth-largest number of wealthy individuals by 2015.

As a further indication of the country’s dramatic rise, China accounted for 27.5 percent of global luxury goods consumption in 2009, translating to a value of nearly US$10 billion, and is expected to consume as much as US$14 billion within five years. In terms of purchasing power parity, China’s GDP surpassed that of Japan last year and is now second in the world at US$10.08 trillion.

However, the country contains a massive population and its per capita GDP was merely US$7,518 in 2010, making China 125th in the world. Today, 2.8 percent of Chinese are living below the poverty line and, according to World Bank figures, approximately 500 million Chinese live on less than US$2 per day. Despite the fact that over half of China’s 1.37 billion people live in rural areas, the demographic accounts for only 12 percent of the country’s total wealth. So although China has undoubtedly risen dramatically and transformed itself into a nation of great economic success, the benefits of this newly accumulated wealth have not been shared equally.

This has been especially true for rural residents, and with most of China’s economic and infrastructure development efforts concentrated in urban areas, the situation has not been improving. For this reason, hundreds of millions of rural Chinese workers leave their homes annually to look for better opportunities in the coastal cities where they can earn three to four times as much.

Currently, China is seeing the widest gap between the rich and the poor since the beginning of economic reform in 1978. This economic disparity has been plaguing the nation for decades, but has only recently made its way onto the national policy agenda. Perceiving that such disparity could lead to instability and potential uprising, the Chinese government has finally begun to take action – announcing measures to combat economic inequality within China through its 12th Five Year Plan (FYP).

There are a number of sections in the 12th FYP that reflect the central government’s efforts to attack poverty and unbalanced economic distribution. Income distribution is expected to find more balance and minimum salaries will be raised. The government also plans on tax reform, which will raise the income deduction threshold to reduce the tax burden on the country’s low income population and regulate its high income population. Social welfare programs will also be expanded to provide assistance to more people living in poverty.

While there is a consensus that the Chinese government is beginning to address the country’s wide economic gap, there are split opinions regarding potential outcomes of the policies. While some applaud China’s initiatives and remain positive about the outcome of the 12th FYP on the current economic situation, many also feel skeptical about its effects. Some argue that the government’s measures of simply raising the current tax threshold are not radical enough to bring about changes compared to a thorough reform of the current income tax structure. Others simply feel that China’s irrational taxation and fiscal system will not be able to close the gap between the two groups in the near future.

Whatever the case, China has pledged to work towards fair wealth distribution and better livelihood for people in its 12th FYP. Its outcome will be a point of interest for China as well as many international audiences.

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