Event

China’s State Council has approved guidelines of income distribution aimed to reduce inequalities by 2015. A particular focus is put on increasing low and middle incomes and social security expenditures. Among key measures, China’s cabinet commits to raise by 5% dividends paid by State-Owned Enterprises (SOEs) to the Government, to lift minimum wage to 40% of average urban salary, to widen the fluctuation band of deposit interests, to expand property tax trials, and importantly, to grant residence and social security rights to migrant workers. The ultimate ambitious goal is to double the average household income by 2020, from the 2010 level.

Impact on country risk

These plans have been prepared under the previous leadership and have suffered a lengthy delay due to opposition from SOEs and local governments. The process confirms how fundamental it is to address the wealth divide that keeps rising with China’s development as shown by China’s high “Gini index”. This is an inevitable commitment for the Communist Party and new leaders in order to rebalance the economy through boosted households’ consumption after it having eroded over the past decade. It also matters for the regime’s legitimacy, which basically rests on improving people’s welfare. However, even though income transfers are essential to internal stability, there are few clearly defined targets and implementation of reforms will face serious hurdles which primarily lie in vested interests at government and SOEs level.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com