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PrintToday, the State Council authorized the publication of “Opinions on Deepening Income Distribution Reforms” prepared by the NDRC, the Ministry of Finance, and the Ministry of Human Resources and Social Security. A few days ago, the NBS revealed for the first time that the Gini coefficient in China has reached 0.474, suggesting that China’s income inequality is now more serious than in 90% of the countries in the world. The announcement of this plan is obviously a response to the mounting public pressure for reforms to improve income distribution.
This document contains 35 measures with the goals of reducing poverty, expanding the size of the middle-income class, rationalizing income distribution, raising the proportion of household income in the national income, and substantially increasing the proportion of budgetary allocation to social spending. Among these 35 measures, we believe the following few are relatively new and will have some meaningful implications for the economy as well as for many sectors and firms. In the following paragraphs we discuss these particular measures.
On compensation of SOE managers
This document contains 35 measures with the goals of reducing poverty, expanding the size of the middle-income class, rationalizing income distribution, raising the proportion of household income in the national income, and substantially increasing the proportion of budgetary allocation to social spending. Among these 35 measures, we believe the following few are relatively new and will have some meaningful implications for the economy as well as for many sectors and firms. In the following paragraphs we discuss these particular measures.
On compensation of SOE managers
- The compensation of senior SOE managers who are appointed by the government will be capped, and part of their compensation will be subject to deferrals and claw-back provisions.
- The compensation of senior SOE managers should grow at a slower pace than that of average employees.
Our comment: Although the above provisions may help reduce income disparity between SOE managers and employees, they may further delink managers’ incentives from the financial performance of companies. The side-effect of these measures on company performance may outweigh their perceived income distribution benefit.
On SOE dividend payout
- For centrally-owned SOEs, raise the ratio of their dividend payout to the government budget by another 5ppts in the remainder of the 12th Five Year Plan (i.e., by 2015), and allocate part of the payout increase to social spending.
Our comment: We strongly support this reform and believe that it can help reduce excess investment by SOEs and will be a meaningful contribution to income redistribution. The reform should continue beyond 2015 and eventually raise the payout ratio to 30-40%.
On social spending
- The government will increase the budgetary allocation to education, employment, social security, health care, public housing, and poverty reduction. For social security and employment, the allocation as a percentage of total budget should increase by 2ppts in the 12th Five Year Plan.
Our comment: According to our calculations, higher social spending is the one of the most effective ways to reduce the Gini coefficient. Sector-wise, these policy changes will help improve the demand and profit outlook for the health and education sectors.
On personal income tax reform
- Develop a personal income tax framework that includes elements of a scheduler tax system and a global income tax system. For high income individuals, all sources of incomes need to be covered by the tax system. Conduct research on the levy of an estate tax at an appropriate time.
Our comment: We welcome the direction of the personal income tax reform, which will significantly broaden the tax base and achieve a better income distribution effect. However, the discussion of an estate tax may be too early and could scare many wealthier individuals away from China.
Overall, we believe this reform plan is a useful start towards the goal of improving income distribution. However, the details of some measures will need to be spelled out, some proposed measures should be modified, and others made more aggressive in order to have a meaningful impact.
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