Following the US presidential election, the handover of power to the next generation of Chinese Communist Party (CCP) leaders at the 18th Party Congress was another global focal point. The new leadership is likely to face several major challenges on the economic front: a broadening income gap, massive local government debt, a fiscal burden caused by an aging population and corruption among officials.
China’s rapid economic growth has made many people rich and the number of wealthy Chinese is rising quickly as the income gap continues to widen.
In 2010, about 1.1 million Chinese households had US$1 million or more in assets. The average national annual income was 13,476 yuan (US$2,140) per person, while the average income among farmers was 5,919 yuan. According to the World Bank, China’s Gini coefficient reached 0.47 in 2010, almost twice as high as 30 years ago and greatly exceeding the internationally recognized warning value of 0.4.
In May, a joint report by the People’s Bank of China and a Chinese university showed that the income of the richest 10 percent of China’s households accounted for 57 percent of total household income, while the income of the poorest 10 percent of all households accounted for a mere 1.4 percent of total household income.
Furthermore, China last year raised the poverty line by 25 percent to an annual income of 1,500 yuan, from 1,196 yuan in 2010. Following this move, the number of China’s poor increased from 30 million people to more than 100 million. Since the poverty line is expected to be further raised in the current five-year plan, the number of poor people is expected to jump to 245 million. The widening wealth gap will create enormous social problems and is likely to become the greatest challenge to the CCP’s new leadership.
Massive local debt poses another major challenge. This issue has not only commanded Beijing’s attention, but also attracted warnings from foreign credit rating agencies. Heavily indebted local governments can be seen across the country. For example, the debt ratio of Hainan Province stands at 100 percent and the same is true for one-quarter of Chongqing’s 40 administrative districts and counties.
In addition, according to the Chinese central bank’s 2010 China Regional Financial Performance Report, released on its Web site, total bank loans had reached 47.92 trillion yuan by late 2010, of which 30 percent, or 14.4 trillion yuan, was lent to local financing platforms. One-third of the loans came from China Development Bank and the remainder from state-owned commercial banks and city commercial banks. At present, between 2 trillion and 3 trillion yuan of these loans have been confirmed to be at risk of default.
According to credit rating agency Moody’s, local debt might even be higher than Chinese government estimates, putting the Chinese banking industry at an even greater risk from bad loans. Compounding the problem is the peak debt redemption period for local debt from last year to next year throughout which local governments are expected to have cleared almost 60 percent of their debt. If the problem is not resolved promptly, it will spawn a big crisis in local development efforts and the financial market, obstructing China’s economic development.
Yet another challenge to economic development is the decreasing labor force and increasing social welfare expenses caused by the aging population. The latest UN data show that due to China’s long-term one-child policy, there are 180 million people above the age of 60 and it is estimated that China’s retired population will equal the total US population in 20 years. By 2035, there will be two retired people for every five workers in China, creating a heavy burden for young workers. Since there are not enough young workers and too many people living on retirement pensions, China’s financial system will be dragged down. This will be one of the most crucial challenges facing the new leadership.