Capital in Twenty-First Century China

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China’s inequality story received only scant attention in Thomas Piketty’s monumental new book, Capital in the Twenty-First Century. Piketty drew data mostly from sources in France, Britain, the United States and, to a lesser extent, Germany, Canada, Japan, Italy and Australia. These are all countries that have large quantities of capital and long histories of capital accumulation.

But now, as China is poised to become the largest economy in the world and also one of the countries in which inequality is rising faster than anywhere else. China could to a large extent define the contours of global inequality in the twenty-first century, just as Great Britain and the United States did in the nineteenth and the twentieth centuries respectively.

In the closing decades of the twentieth century, China had already begun to reshape the global landscape of inequality. On the one hand, economic growth of historical proportions lifted hundreds of millions of people out of poverty and raised the standard of living for one-fifth of humanity. A direct effect of China’s economic boom on global inequality was to reduce it, simply by closing the income gap between China and the richer parts of the world.

On the other hand, however, China has seen an extremely rapid pace of wealth accumulation, helping it to become one of the most unequal countries in the world, with a rate of increase in the last three decades that is virtually unparalleled elsewhere globally.

If one subscribes to Piketty’s core thesis — namely, that the key driver of increasing inequality is the rate of return on capital being higher than that of economic growth — then the future of inequality in China does not seem promising at all. Two megatrends, both inevitable, may drive up inequality in China: slowing economic growth and a rapidly ageing population.

As China’s average income level further approaches that of the developed world, rising inequality in China will also have an increasing global impact. Chinese wealth in recent years has already begun to show its power globally and at an accelerating pace.

Yet in a short three decades, the country has seen a rise first in income inequality, followed shortly thereafter by increased wealth inequality.

By the late 2000s, China’s Gini coefficient, a common measure of inequality, exceeded 0.5 — a sign of severe inequality. Wealth data in China is still hard to come by. From reports of extremely wealthy Chinese business people and corrupt Chinese officials, it is nevertheless easy imagine a much more unequal distribution of wealth than of income.

China has been able to survive such a massive increase in inequality so far, largely thanks to its high growth rate (over 10 per cent a year on average for nearly three decades) and the waning years of its rapid population growth. Rapid population growth tends to help reduce inequality, since it dilutes inheritances, while fast economic growth means that previously accumulated wealth becomes less important.

But both of these equalising forces are waning in China. A slow growth regime, both demographic and economic, has arrived. China’s demographic inflection point was reached a couple of years ago, when its demographic dividend, a measure of the effect of population age structure on economic output, turned from positive to negative. China’s current fertility level is only at around 1.5 children per couple and has been well below the replacement level for over two decades, with no signs of a rebound even though the one-child policy is being phased out. In a decade or so, the Chinese population will begin to shrink.
Meanwhile, China’s economic growth rate, which has been running at between seven and eight per cent since 2012, is already more than 30 per cent below the average for the preceding decade, and it will more likely than not slow down further. As China enters into a comparatively low growth regime, inherited wealth will quickly assume a new prominence. With it will come a new phase of Chinese capitalism.

A uniquely interesting feature of the Chinese low growth regime will be how wealth and demographics interact. China’s recent wealth explosion has benefited its urban population disproportionately more than its rural population. Many urban Chinese saw their wealth grow from virtually nothing to very high amounts by either inheriting their free apartments from the socialist era or by entering the urban real estate market early.

Rural Chinese are largely excluded from this process. Almost all urban families are one-child families. Inherited wealth in China will not only be concentrated but it will also be concentrated among people with the smallest number of children. Piketty’s argument about the deleterious effects of slow population growth on inequality is thus even more relevant for China.

A slow growth regime does not necessarily spell doom. Its effect on economic sustainability, social vibrancy and political stability depends largely on what political choices China makes now and in the years to come. ‘The history of distribution of wealth has always been deeply political’, Piketty reminds us. A wide array of policy choices is still available to China — from capital and inheritance taxes to the creation of a social safety net and channels of social mobility.

It will be interesting to see whether China’s political elite has the will to prevent further wealth concentration in its own hands.

This article is part of an East Asia Forum miniseries examining inequality in Asia and its implications. Original texts can be found here.