By Jin Ge

“Last year the Chinese Government spent as much money on public medicare as Greece did, though China’s population is a hundreds times bigger than Greece”, said Financial Times’s Jamil Anderlini at the FT Annual Forum in Shanghai on July 16th. He was talking about why among Chinese people there is a strong sentiment against China’s participation in rescuing Greece or other indebted European government. Many people around me are also saying things like: “if our government is so rich that it can save Europe, why don’t it save us from unaffordable medicare, education or housing first?”

Last year Chinese government’s spending on medicare is actually 480 billion yuan, 20% more than that of 2009,  but still only 5.3% of total fiscal spending and 1.2% of our GDP.  I cannot find the data of Greece, but I found out that in the past several years medicare usually occupy more than 20% of the US’s fiscal spending, and at least 5% of GDP. Even the US is more socialist than China in terms of welfare.

Chinese scholar Qin Hui once presented the argument that China actually has a system of negative welfare. In other words, if there is any kind redistribution of wealth in China, it’s a wealth transfer from households to the state. In 2010, the central government’s fiscal income already hits 8.3 trillion yuan, in 2011, it is destined to set a record over 10 trillion yuan. This number is more than three times that of 2005, which is a little above 3 trillion; even our celebrated GDP growth pales in comparison to the growth of fiscal income. However, the growth of people’s income lagged far behind that of the government, according to the data from National Bureau of Statistics, in 2010 urban resident’s average income increased 7.8% while peasant’s average income increased 10.9%. No wonder consumption’s share in GDP has been declining and stands at an astonishing low of 35%, that number for most high-saving Asian countries is around 50% while consumption makes up more than 70% of the US’s GDP.

Wealth transfer from households to the state through various channels. First, there is land reclamation (Zhai Qian), an urbanization process full of Chinese characteristics. In China, the government classified all the land into categories like agricultural land, industrial land, or urban commercial land. A piece of land can only be developed into residential or commercial property after it is designated by the government as “urban commercial land”. Thus, the local governments usually reclaim the land from peasants at a low price as agricultural land, then they can auction the land out to real estate developers at the high price of urban land. Then, the urban middle-class have to use up most of their families’ saving to buy apartments from real estate developers.

Portraits of China GDP@Ge Jin

Another major channel of wealth transfer is inflation plus negative interest rate. This year China’s core inflation fluctuated between 5% and 6% according to official report, but most people feel the office report is hiding a much uglier truth. Anyway, the interest rate for one-year term deposit is only 3.5%, and only 0.5% for demand deposit, far lower than inflation rate.

But state-owned enterprises, who are the receivers of most of the loans from the big banks in China, benefited hugely from the repressed interest rate. According to a research by Giovanni Ferri and Li-Gong Liu from Hong Kong Institute for Monetary research, state-owned enterprises’ profit would drop to zero if the interest rate of their loans is equal to inflation rate. That means our state-owned enterprises only makes money through a credit subsidy at the expense of savers. Michael Pettis, a finance professor at Beijing University, estimated that every year at least 5-7 per cent of GDP worth of wealth is transferred from households to the government, banks and state-owned enterprises though this negative interest rate set by the central bank.

The other channels of perverted wealth transfer include: the monopoly of state-owned enterprises in key sectors from finance, energy to telecommunication; the over-exploitation of environment which renders short-term benefits to certain industries but nightmarish long-term cost to the whole society; and public institutions that are funded by taxpayers but seek to maximize their own profit and direct resources to those who hold power, which includes many public hospitals, schools and charity programs in China. This post will be not able to cover all of the above, but this blog will continue to investigate the wealth distribution problem of China, which in my opinion remains the biggest threat to not only the sustainability of China’s economy but also our social stability.