Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
The author is founder and chief economist of Enodo Economics. She is also a senior fellow on the Chinese economy at the Asia Society Policy Institute’s China Research Center.
My friend Wang seems to have it all. Wang, a finance professional in glittering Shanghai, has earned his stripes. He was the first in his farming family to go to university; then the first to go abroad to study and work in the UK. China kept calling (his parents were keen to have grandchildren), so Wang returned home to take a lucrative job in the country’s growing financial sector.
He married his college sweetheart and this summer showed me his second child, a beautiful, whiny baby who makes Wang’s parents and his government happy. The couple can look forward to subsidies and cheaper child care as authorities race to reverse the demographic collapse accelerated by China’s long-standing “one-child” policy.
For decades, the People’s Republic of China has grown from strength to strength, offering a higher standard of living across the country and nurturing the dreams of millions of recent graduates hoping to follow in Wang’s footsteps. But Wang worries that he won’t be able to support his growing family in an economy that has seen better days. He’s working much harder for less money as Chinese leader Xi Jinping clamps down on the financial sector. His apartment is worth less and his savings are earning next to nothing in bank deposits.
Wang, who is considering moving to Hong Kong, is among many people in China’s financial industry who have told me they are feeling the chill of Xi’s income and wealth redistribution efforts. Plans are afoot to cover The annual salary for employees at all state-backed financial institutions is around $412,000 and requires back pay. Many financial firms have already cut salaries and bonuses and asked their staff not to wear expensive watches or clothes to work. China’s anti-corruption watchdog has vowed to stamp out ideas of a Western-style “financial elite” and rectify the hedonism of excessive pursuit of “high-end taste,” according to Reuters.
Of course, ambitious financial professionals in China still enjoy rewards that are hard to match in other careers. The average annual salary in urban China is still less than $17,000, but their grievances and the political factors behind them matter to the world: a stagnant, sullen China would weigh heavily on the global economy.
Wang’s concerns about the future help explain China’s extraordinarily weak consumption. The Achilles heel of the economyHousehold consumption accounts for just 37% of GDP, compared with 68% in the United States. Higher spending is crucial to revive China’s flagging performance.
The financial sector is just the latest target for Xi. He has previously cracked down on internet platform companies, the after-school tutoring sector and the property sector. All of this is part of Xi’s broader mission to reduce China’s widening income and wealth gap.
But Xi’s strategy can only succeed if it does not remove the incentive for the well-educated middle class to get ahead in life. In China, the Communist Party largely determines interest rates, exchange rates and the flow of credit to businesses and households. In this way, it can channel people’s savings into those sectors of the economy that best serve its interests. It can also set bank deposit rates below the rate of inflation, which punishes savers. And through capital controls, it prevents people from investing much of their money abroad.
With these and other measures, Chinese households are finding it difficult to increase their wealth and earn a decent income from their assets. Most of China’s wealth is invested in real estate, so falling housing prices are deeply reducing household wealth. And the stock market in China remains more of a casino than a reliable investment alternative. The result is that households are saving more for a rainy day.
The third Communist Party plenum in July, which set economic priorities for the next five years, produced some good consumer-support policies. Promises to give equal status to migrant workers lacking urban residency permits, to improve the provision of health care and social security, and to reduce education costs were welcome. But the plenum failed to address the economy’s most pressing need: a redistribution of income from businesses to households.
It is true that the government has pressed ahead with a series of plans to encourage consumers to save less and spend more. The measures include more care for the elderly, a five-year urbanization plan and more support for a subsidy program for replacing cars and other goods with cleaner ones. But these measures are just a band-aid when what is needed is major surgery. They are unlikely to convince my friend Wang and consumers like him that the good times are coming back.