China’s National Income Distribution in the New Normal: Characteristics, Contradictions and Reforms*
This paper discusses the evolution and characteristics of China’s national income distribution structure after the dawn of the new century and particularly in China’s new normal of social and economic development. This paper casts light on the profound national income distribution and redistribution effects of changing ownership and economic reforms, as well as the microscopic household income distribution effects of changes in macroscopic distribution structure. Based on an analysis of changes in macroscopic distribution pattern, this paper explains the structural contradictions of national income distribution in China and their effects on China’s economy, providing a theoretical analysis of income distribution for deepening supply-side structural reform.
supply-side structural reform, macro distribution of national income, income distribution structure
JEL Classification Codes: D31, E25, O47, P24
As China’s economy entered the new normal, China has initiated supply-side structural reforms as a long-term, fundamental and strategic initiative to transform its development pattern and implement new development concepts in the face of opportunities and challenges arising from changing domestic and international situations. Supply-side structural reforms require systematic transformations at all levels, including development concepts and patterns, corporate competitiveness, market mechanisms to ensure fair competition, industrial organization and structure, regional structure and balanced development, macroeconomic regulation and policy-making. Among supply-side structural reforms that involve every facet of social and economic life, improving national income distribution is of the utmost significance.
First, compared with demand-side stimulus, supply-side solution is a more fundamental approach for controlling and mitigating supply-demand disequilibrium. In nature, aggregate supply is valueadded that is newly created in the economy, i.e. gross national product (GNP) or gross national income (GNI). In this sense, aggregate supply equals labor compensation and various surpluses, which can be decomposed into corporate surplus and government tax income, i.e. “v+m”. Supply-side structural reforms are intended to address the problems of national income distribution.
Second, given the intrinsic supply-demand correlation, sluggish aggregate demand can be attributed to a multitude of factors - the most important being the imbalance ( even polarization) of national income distribution at supply side. This has led to the cyclical relative oversupply and economic crisis
of capitalism explained in Karl Marx’s Das Kapital1. Despite its fundamental difference from capitalist economies, insufficient domestic demand that emerged in China’s new normal is largely correlated with distorted income distribution. What appears to be insufficient demand is essentially income distribution distortion at the supply side. In addition to stimulating aggregate demand, therefore, improving supplyside national income distribution is also of great relevance.
Third, as a basic element of aggregate supply, national income distribution is linked to a host of other supply-side structural contradictions. The formation and change of sectoral, regional and urbanrural structures of national income distribution at the macro level, together with household disposable income gaps and their adjustment at the micro level, will fundamentally influence a series of structural evolutions, including investment structure, industrial structure, corporate cost structure and consumer spending structure. Deepening supply-side structural reforms requires structural improvement to national income distribution2.
1. Formation of the Socialist System and Primary National Income Distribution
China’s transition from a planned economy to a market- based one has transformed resource allocation. Under dominant public ownership that coexists with other ownership systems, China has also developed a distribution system where distribution according to labor coexists with other forms of income distribution. Factors that impact national income distribution include not only labor but other factors such as capital, technology, property and management. Aside from labor income, household income also includes incomes from various privately-owned production factors. Such transformations in ownership, economic and distribution systems led to profound changes in China’s income distribution pattern3.
Between 2004 and 2013, China conducted three rounds of national economic census to acquire extensive economic, social and environmental data, particularly classified data of firms in different categories, national economic accounting and employment. The data indicate that during the third economic census, China’s economic aggregate increased remarkably (with an annual average economic growth rate of around 10%). Rapid economic growth went hand-in-hand with changing economic structure. As can be seen from the data of national economic accounting and particularly cash flow sheet, China’s changing national income distribution and redistribution over the past decade exhibited the following characteristics:
First, significant structural changes occurred in the shares of institutional sectors in the primary distribution of value-added (GDP) and total income.
In national economic accounting, these institutional sectors are classified into non- financial corporate sector, financial sector, household sector and government sector according to income and spending entities and their income distribution characteristics. Such classification is referred to as the classification of institutional sectors. After primary distribution, the shares of institutional sectors in income distribution will change relative to their shares in GDP before primary distribution. This is due to their different income and spending behaviors related to the use of production factors. Generally, non-financial corporate sector and financial sector account for smaller shares given their positive net factor expenditures, i.e. negative net factor income. Government and household sectors account for increasing shares due to positive factor net income, i.e. negative net factor expenditure. In 2013, nonfinancial corporate sector accounted for the greatest share (about 60%) of value-added, while household sector accounted for a smaller share (less than 30%). After primary distribution, household sector
accounted for the highest share (about 60%), while the share of non-financial corporate sector dropped to approximately 20%.
Government and household sectors accounted for falling shares of GDP over the past decade (2004-2013), with the share of government sector down from over 10% to less than 5% and the share of household sector down from 28% to less than 22%. In contrast, the share of non-financial corporate sector rose from over 58% to almost 65%, and the share of financial sector increased from less than 4% to almost 11%. These changes are associated with differences in the development of economic sectors with various ownership systems. Growth in government employees’ compensation outpaced by economic growth and growth in individual economy outpaced by overall corporate sector growth respectively led to the falling shares of government and household sectors. The increasing share of non-financial enterprises is manifested in the rapid development of manufacturing enterprises. Their development is also manifested in the fast-growing share of financial institutions’ income and increasing dependence of economic growth on financial institutions (see Table 1). Overall, these structural changes are positive, and market- based reforms give play to the role of production factor incentives, thus boosting productivity in the production (supply) sector, particularly the development of non-financial enterprises. On the other hand, we may also notice that in the transition process, certain adjustments (such as government employees’ compensation) did not keep pace with the market, and some sectors (such as financial sector) practiced protective monopoly at the expense of other sectors, which is unfair and compromises efficiency.
This table compares the shares of value-added and GDP before and after primary distribution. As can be seen from the table, the most noticeable change is the share of non-financial corporate sector’s income from primary distribution, which decreased by a wider margin compared with its share in GDP (up from around 36% in 2004 to about 41% in 2013). Accordingly, the share of household sector increased by a wider margin (up from around 30% in 2004 to about 36% in 2013). The shares of government and financial sectors changed slightly in different directions. The transition from production process to primary distribution reflects an increase in the transfer of factor income and particularly non-labor factor income between institutional sectors. This represents a change to the economic structure brought about by the development of different ownership systems after ownership reform.
Second, significant changes have occurred in the size of China’s property income and expenditure, as well as their share in the economy due to changing property system stemming from changing ownership structure. These changes have influenced the structure of primary distribution in important ways.
Under socialist market economy, assets as an important production factor cannot be used free of charge in the production process. Asset users must pay relevant costs according to competitive marketbased standards, and asset owners thus receive property income. In this manner, internal and mutual property incomes and expenditures among institutional sectors are incurred. After various factor incomes and expenditures, i.e. primary distribution, GDP (“domestic aggregate” of the value-added generated by various institutional sectors) is formed into gross national income (GNI) (“domestic aggregate” of total
4 income from the primary distribution of various institutional sectors) (see Table 2).
During 2004- 2013, property income and expenditure as a share in total factor income and expenditure changed the most prominently, up 8.1% and 7.4% respectively. This implies property’s stronger position as a production factor in the economy and primary distribution. The shares of other factors’ incomes and expenditures including labor compensation and production tax increased slightly. The share of labor compensation income and expenditure increased by about 4%, indicating improved labor income from primary distribution. The share of net production tax decreased by more than 2%, indicating the primary distribution effect of government tax cut policy in production sectors. Changing property incomes and expenditures are a manifestation of the entry of public and non-public assets as exclusive production factors into the market, with an increasingly important role in national production. Accordingly, assets played an increasingly important role in primary national income distribution.
Overall, the share of non-financial corporate sector (enterprises) in the net expenditures on assets significantly increased. Accordingly, the shares of net property incomes of government and household sectors increased5 (see Table 3). Non-financial corporate sector has the highest net property expenditure, which is equivalent to the sum of net property incomes of government and household sectors. This
indicates that in their development process, China’s non-financial enterprises increasingly rely on other sectors for financing (via financial institutions or direct financing). Their increasing financial leverage resulted in growing property expenditure cost and rising financial risks.
Land rent changed the most in government sector’s property income. As can be seen from the data in Table 4, land rent accounted for 50% of government net property income in 2013. This led to a great change in the share of government net property income in total income, particularly its share in primary income distribution. Interest income is a major source of household property income. Despite certain interest expenditure, household sector’s net interest is still positive, and interest income is even greater. Another source of property income for government and household sectors is dividend income, and government sector’s dividend income is significantly greater than household sector’s. This implies that despite the falling share of state sector of economy (including the number of enterprises, employment, production and investment, among others), its dividend contribution to the asset owner (government) is far higher than that of private sector to households as asset owners. To some extent, this reflects the difference between the state sector and the private sector of the economy regarding income distribution. Over the years of its development, the private sector of the economy retained most of profits in firms, with a rather small portion of profits distributed to the household sector6.
For the household sector, therefore, interest income rather than dividend income is a key determinant of its property income. For instance, the share of household sector’s net property income in primary disposable income rose from 2.8% in 2004 to 4% in 2013. While this increase appears to be rather small, interest income and expenditure are of different nature in household income. Interest income mainly comes from household savings or other financial lending activities (such as the purchase of treasury bonds and corporate bonds), and the increase of interest spending reflects rapid increases in housing mortgage loans and associated interest expenditures in China over the recent years. While the former is income from household property, the latter is expenditure arising from household consumption (housing investment). In fact, such expenditure is part of current consumption, but is classified as property expenditure due to the nature of housing loan. From the perspective of total property income, the share
of household sector’s property income in total income from primary distribution increased by about 6.2%. Total property income and net property income should be examined in combination to better explain the degree of non-labor compensation’s impact on household income from primary distribution.
Third, with deepening reforms of socialist market economic system with Chinese characteristics and labor factor market development, different changes have occurred in labor compensation under different forms of ownership.
Based on data from China’s national economic accounting, China’s labor compensation as a share in GDP kept on the increase year by year (as opposed to falling before 2008), eventually exceeding 50% in 2013 (50.8%), indicating an increasingly stronger position of labor factor in the primary distribution of national income. This implies that China’s distribution system dominated by distribution according to labor with various coexisting distribution methods will ultimately increase the share of labor income in primary distribution, and the degree of such increase is largely dependent on changes in the labor market supply-demand relationship. In the primary distribution of household sector, labor compensation accounts for 84.5% of household primary income distribution, individual economy income accounts for 11.5%, and property income accounts for 6.2%. Labor compensation remains the most important source of income for the household sector.
Labor compensation changed differently under different forms of ownership. According to the Third National Economic Census, the workforce receiving labor compensation can be classified into the following four categories7. First, the workforce of SOEs, including SOEs, collective enterprises, solely state-funded companies and SOEs in financial sector, whose income is consistent with the principle of “distribution according to labor” under traditional public ownership (however, current distribution standards are determined with reference to market standards in most cases, rather than entirely regulated by the government). Such workforce accounts for about 10% of the total workforce.
The second category is the workforce of private enterprises, including private enterprises, enterprises solely funded by investors from Hong Kong, Macao and Taiwan, and 100% foreign-funded enterprises. Their labor compensation is paid by business owners. Essentially, such workforce is employed labor with market-based pricing. This type of workforce accounts for more than 20% of the total workforce.
The third category is individual business owners (small private economy), including self-employed business owners and the workforce of the primary industry. In national economic accounting, such
workforce is classified as the self-employed workforce, and accounts for more than 40% of the total workforce8.
The remaining less than 30% of the workforce is employed in various types of mixed-ownership enterprises, with most employed in the non- public economy. Although the workforce of publicly owned institutions accounts for about 10% of the total workforce, labor compensation in public sector accounts for no more than 15%, given that public sector’s average labor compensation is only slightly above the average labor compensation, among other considerations. The remaining over 85% of labor compensation is fundamentally different compared with that in the traditional planned economy in terms of nature and pricing method. Changing composition of the workforce took place amid China’s transition from the traditional planned economy to a market-based one, and is compatible with China’s basic system of dominant public ownership coexisting with other ownership systems. It is neither a reflection of traditional public ownership and its forms of realization nor a reflection of employed labor totally under private ownership.
2. Development of Socialist Market Economic System and Changes in National Income Redistribution
On the basis of primary income distribution of various institutional sectors, the steps of national income redistribution and current transfer income and spending redistribution are also required to form the disposable incomes of institutional sectors for the final use of national income for investment, savings, consumption, etc. (see Table 5).
Current transfer incomes and payments include: (1) Ordinary taxes such as income tax and property tax, including corporate income tax, personal income tax and property tax imposed on businesses and households (during 2004-2013, China’s ordinary tax income as a share in government disposable income increased from 14.8% to 26.3%). (2) Social insurance contributions (social insurance contributions as a share in the government sector’s disposable income increased from 17.6% to 32.6% during 2004-2013). (3) Social insurance benefits received by households from the government (its share in government disposable income increased from 14% to 26% during 2004-2013, while its share in the household sector’s disposable income increased from 5% to 8%). (4) Social relief provided by the government to the underprivileged (this spending accounted for 9% of government disposable income in 2013, reaching 989.96 billion yuan. This, together with relief provided by the corporate sector in the amount of 19.13 billion yuan, means that the household sector received over one trillion yuan in relief funds in 2013). (5) Other current transfers, which are primarily non-factor-related current transfers between households and from firms to households, such as relief funds offered by firms to households and donations among households. As can be seen from the composition, current transfer occurs after the production process, and is not related to any production factor. It is mainly conducted by the government to regulate the incomes of firms and individuals in accordance with relevant laws and regulations to adjust income distribution differences and improve social security.
As the above analysis shows, China’s national income redistribution took on new characteristics with changing ownership structure and market-based resource allocation mechanism. First, income tax represents a growing share in government disposable income. Second, as the burden of social protection becomes partially transferred from government to corporate and household sectors, government surpluses can be used to create conditions for improving future social protection. Third, as government