China's Hidden Income

Credit Suisse along with the China Society of Economic Reform recently sponsored economist Wang Xiaolu of the National Economic Research Institute's China Reform Foundation to conduct a second round of research in to the "grey income" of Chinese workers as a follow up to an earlier report that the economist published in March 2008.

According to Wang's report, which, like the original, is titled Analysing China's Grey Income, was published on August 3. The report estimates that China's hidden or unreported income came to 9.3 trillion yuan in 2008.

Wang's research, which relied on over 4,000 samples taken from across 19 provinces and 64 cities, aimed at quantifying the amount of hidden or grey income that is being collected in China.

The final estimate of 9.3 trillion yuan, amounts to 30 percent of China's GDP and Wang asserts that approximately 63 percent of this hidden income was paid to the wealthiest 10% of urban households.

Wang estimated that the average per-capita disposable income of urban Chinese households in 2008 was 32,154 yuan per annum, 90 percent above the official figure published by the National Bureau of Statistics.

The survey also showed that the wealthiest 10 percent of households were reaping an average per-capita disposable income of 139,000 yuan per annum in 2008, while the official data put the average income of this section of society at 44,000 yuan a year.

According to estimates based on Wang's reasearch, high income households in the second decantile (those who's earnings ranked them as being above 80% of the population, but not in the top 10%) actually received an average per-capita disposable income of 55,000 yuan a year, over double that of the officially announced 26,000 yuan a year.

The analysis said some 80 percent of hidden income was being taken home by the top 20 percent of households and two thirds of the hidden income was being paid to the top 10% of households.

After taking account for Wang's estimate of hidden income, average urban disposable income per capita reached 32,000 yuan a year, almost double the figure estimated by the official data.

When comparing the results of Wang's less extensive 2005 study, the economist found that the net amount of hidden income (9.3 yuan trillion) had doubled, rising at a much faster pace than nominal GDP between 2005 and 2008.

Wang said the existence of hidden income expanded the country's income gap remarkably.

After the adjustment, the per-capita income gap between the incomes of the top 10 percent and the bottom 10 percent of urban residents rose from a multiple of 9 based on the official data to a multiple of 26. The per capita income gap between the top 10 percent of urban households and bottom 10 percent of rural households rose from a multiple of 23 according to the official data to a multiple of 65.

The analysis said after taking into account the existence of hidden income, the Gini coefficient of household income distribution was remarkably higher than the 0.47-0.50 calculated by different experts.

In his report, Wang also argued that such a concentration of hidden income in high-income groups demonstrated that much of the diffiuclty in measuring real income was not to do with simple statistical problems in the household survey but rather the potential for hidden income to come from illegal sources.

The data showed that grey income had its origins in the misuse of power and is closely connected to corruption.

Wang thought the widespread existence of grey income had significantly distorted national income distribution and revealed the lagging development in social reforms compared with economic reforms.

In the report, Wang recommends a combination of wage increases and reforms to the tax system.

He said "China should not only raise wages, but optimize its tax system to narrow the wealth gap. For example, we expect the government to implement property tax, which should increase the holding costs for rich people's property investments."

Links and Sources
Credit Suisse: Full Text of Report
Caixin: Shedding Real Light on China's Shadow Income (article on the report by Wang Xiaolu)
Standard Chartered: Wang Xiaolu Introduction
National Economic Research Institute, China Reform Foundation: Official Site