The Communist Party seems focused on addressing rising income inequalities in China. The China Daily article reports on the huge discrepancies between working for State-owned entities and private companies. The Economic Observer next discusses measures taken by the Government to reduce the wealth flowing to governments and state-owned enterprises, especially the central government and those centrally-owned enterprises (COE). (My emphasis)
Wages to be pegged to CPI in new regulation
China is expected to approve a wage regulation by the end of this year in a major effort to improve workers’ lives and narrow the income gap.
Yin Chengji, spokesman of the Ministry of Human Resources and Social Security, said the regulation has been drafted since 2008 and will soon be submitted to the State Council, China’s cabinet, for approval, the China Business News reported on Wednesday.
In line with the draft regulation, the wage increase in the country will be pegged to the consumer price index (CPI), the report said.
Yang Yongqi, a labor law specialist at the China Institute for Labor and Social Security Sciences, under the ministry, said the regulation demands each province to submit its minimum wage guidelines to the central government, as well as to make them available to the public.
It clearly stipulates that overtime pay and subsidies, should not be included in calculating the minimum wage, China Business News quoted Yang as saying.
More than 23 provinces and cities increased their local minimum wages, but some enterprises have extended work time, Yang said.
The draft also said that wages should be increased in accordance with changes in the local CPI.
Employees, especially those at the senior management level in State-owned monopolies, will have their pay capped, according to the draft.
In China, the average monthly salary of employees at State-owned monopolies, such as telecommunications and natural resources, can be triple that of those who work in the private sector. If benefits like housing are included in the equation, their actual income is five to 10 times higher than that of ordinary workers.
The widening gap in pay has resulted in public outrage and driven millions of college graduates to seek jobs at State-owned monopolies, where employees are assured better healthcare insurance and a more stable income.
He Li, a senior lawyer at the Beijing-based Yingke Law Firm, said the new regulation will be the first national regulation to specifically focus on wages.
While China is globally considered to be a strong economic growth engine, a survey conducted by the All-China Federation of Trade Unions (ACFTU) earlier this year showed that 23.4 percent of employees have not received a rise in salary in over five years and that 75.2 percent of those surveyed said they believe the current income distribution system is unfair.
The ACFTU also warned that the low pay, long hours and poor working conditions, faced by millions of workers are a source of conflict with the potential to trigger mass incidents, which would pose a threat to social stability.
Focus of Income Distribution Reform Shifts to Reducing Flow of Wealth to Government
To reduce social conflicts, ensure social fairness and pursue sustainable economic development, the Chinese government has expressed its intention to reform income distribution among all members of society and has assigned three study groups to conduct investigations nationwide.
According to the reform projects, the focus of the reform has shifted to reducing the wealth flowing to governments and state-owned enterprises, especially the central government and those centrally-owned enterprises (COE).
Sources from the Financial and Economic Committee (FEC) of the National People’s Congress and the China Democratic League (CDL) told an EO reporter, it is hoped that the reform plan will be drafted in July and completed at the end of this year. (…)
The FEC is most concerned with the income distribution among governments, enterprises and employees. They want to find out what governments can do to readjust income distribution, where the wealth of enterprises has gone, and what kind of relationship exists between the profit growth of an enterprise and its employee salaries.(…)
The provincial government said that the total national income must grow big enough to be equally distributed. The investigation group disagreed, however, arguing that, without a good distribution mechanism, a larger national income would actually be more difficult to distribute.(…)
Statistics from the NDRC show China’s GDP has grown by an average annual rate of 9.9 percent over the past thirty years while the proportion of workers income as that of total national income has dropped by 13 percentage points since 1995.
The greater proportion of this increased wealth has flowed to governments and state-owned enterprises.
The CDL found the profitability of some private enterprises in Guangdong to be only between 3 and 5 percent which may explain their reluctance to raise the salaries of employees. In response, the CDL recommended that the business revenue tax and other taxes be reduced to leave more profit for enterprises.
Both study groups believe this is a key to solving the issue, in addition to addressing the huge profits of SOEs.
A researcher with the Chinese Academy of Social Sciences Economics Research Institute, suggested to the FEC study group that the ratio of profits of state-owned enterprises given to the central government to their total profit should be raised and the income of the state-owned enterprise employees should be mainly made up of their salaries. This would not only help narrow the income gap between employees of state-owned enterprises and that of private enterprises, but would also shrink the salary gap between high-level executives and ordinary employees of state-owned enterprises.
Another focus of the reform is to adjust the distribution ratios of the revenue of the central government and that of local governments.
The CDL study group found that 60 to 70 percent of the revenue of local governments is taken by the central government which explains the reluctance of local governments to address the issue.
Therefore, members of both the FEC and CDL have advised the central government to allow local governments to keep revenue gained from the real estate tax, value added tax and consumption tax.
According to a member of the CDL, the central government should also raise the threshold of personal income tax as China bears one of the heaviest tax burdens in the world. The study shows that the Chinese middle-class has to pay 30 percent of their income to governments.
The NDRC proposed reform for income distribution in 2006, but no improvements were made because the income distribution reform affected the interests of too many people and was thus too difficult to undertake.
The core of the project drafted by the NDRC in 2006 was to control the earnings of high-income people, expand the income of mid-income people and raise the earnings of low-income people. However, these are no longer the keys aspects of income distribution reform.
The FEC and China Democratic League are experiencing fewer obstacles now as the central government pushes forward reform that ensures social fairness, stimulates domestic demand and shifts the growth model of the economy.
The chart plots the Early Warning Index since 1994. Red characters indicate the “overheating” range, yellow is “increasing”, green “stable”, teal “decreasing” and blue “overcooling”. The indicator is currently declining in the stable range. Tight economic measures seem less warranted.
