Stimulus, Inequality and the Chinese Dream

China’s economy is slowing but, without reforms, stimulus may just help the rich get richer in an already unequal society

By Nathaniel Taplin


Deng Xiaoping, who launched China’s economic reforms, famously said that it was fine for some people to get rich first. As long as everyone got rich eventually, it was a price worth paying for the communist leader.

That narrative, call it the original Chinese dream, was borne out for a long time. China’s opening to the world generated many millionaires and billionaires but also remade China overall into an upper-middle-income society.

There are increasing signs, however, that those Chinese who haven’t yet gotten rich will face a far harder time doing so in the future.

Following steep falls in the early 2010s, inequality is rising again while real income growth has flatlined.

Not only will that make it tougher for Beijing to address today’s slowdown but it could spell trouble for the region and even the world.

Two subtle changes in China’s economy tell the story. Following a long fall from 2008 to 2015, China’s Gini Coefficient, a measure of income inequality, has begun rising sharply again.

Second, since 2016 housing prices have mostly grown much faster than incomes, the opposite of the situation from 2011 to 2015. Young home buyers in China have sources of support that Americans lack; parents often contribute.

But they still face a steepening path and moving onto the housing ladder increasingly requires taking on debt, further eating into incomes.

Gavekal Dragonomics estimates that debt service hit 8.1% of household income in 2018, up from below 5% in 2010 and comparable to U.S. levels.


As in the U.S. prefinancial-crisis bubble economy that pumped up housing prices but also stoked indebtedness and inequality, policy is partly to blame.

Chinese policy makers have repeatedly dodged tough reforms since 2012—particularly to the nation’s dysfunctional banking system, which tends to channel cash into property and state enterprise coffers rather than to entrepreneurs.

Stimulus efforts in 2015 and 2018 boosted housing prices, helping people who already own homes but stoking indebtedness and doing little to arrest the long-term slide in China’s growth.

Policy makers, aware of the ugly side effects, have been far more restrained responding to this latest slowdown.

Worryingly, however, they continue to duck bold measures to fix the banking system or slim down the state sector.

More export-led growth could provide a solution, but Beijing’s unyielding approach to trade disputes—and President Trump’s erratic deal making—have undermined that, too.

Beijing knows it can’t afford nonstop rapid house-price appreciation, but it can’t allow a real property downturn either because that would tank its financial system.

Barring some radical free-market reforms or an unexpected productivity boom, the next decade could witness continually slower income growth and a further widening of the divide between the already-rich and everyone else.

For investors, this is a worrying and volatile mix.

Unless housing prices start dropping or financial troubles at state companies significantly worsen, China’s central bank seems likely to continue its drip feed of support rather than aggressive easing.

Tax cuts may help shore up consumption on the margin, but also mean more government-debt issuance hogging already limited credit supply.

Over the longer run, Beijing may turn even more to nationalism to paper over the cracks in a slower-growing, less-equal society. That could have grave consequences for growth and stability throughout Asia and the world.

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