China's Bubble of Millionaires

SUBHEAD: The recent bubble of millionaires in China may have such inequality as to bring down the system.

By William Pesek on 12 June 2014 for Bloomberg View -
(http://www.bloombergview.com/articles/2014-06-12/china-s-latest-bubble-millionaires)


Image above: A man on a cargo bike passes a Rolls Royce in China. From (http://www.bbc.com/news/world-asia-china-20024880).

Funny how everyone thought China would get old before it got rich. The opposite seems to be true.

A new Boston Consulting Group study shows America's lock on the most-millionaires title may be in jeopardy after a surge in Chinese wealth.

The Middle Kingdom surpassed Japan and Europe in the most recent survey, boasting 2.4 million millionaires. That's still far off the U.S.'s 7.1 million, of course. But the absence of transparency in China and the vast networks that exist to spirit wealth into bank accounts overseas makes it a sure bet BCG's figure is wildly conservative.

This should be good news for a Communist Party trying to transform "poor" China into a prosperous nation, right? In fact, this millionaire bubble is dangerous for two reasons. One, it's raising the odds of social instability. Two, as the ranks of those profiting from the status quo grow, there's even less impetus to restructure the economy.

The first risk is straightforward enough. Even if a few million are rolling in yuan (several million, more likely), most of China's 1.3 billion people aren't. Indeed, the gap between rich and poor is among the highest anywhere. Take China's Gini coefficient, an inequality measure in which 0 represents perfect equality, while 1 means wealth is in hands of one person. The United Nations warns that a score of more than 0.4 can cause socially instability. China's was 0.55 in 2010, up from 0.3 in 1980.

Creating an oligarchy wasn't Deng Xiaoping's plan when he initiated China's economic opening in 1979. Yet the combination of huge gains in gross domestic product and an opaque political system has fueled a robber-baron culture. This reality is coming to light at an awkward moment. Try as they might, Xi Jinping's army of Internet censors can't quell the anger lighting up chat rooms, microblog platforms and text-message systems.

In March, censors struggled to tamp down outrage over reports that ex-security chief Zhou Yongkang might have amassed an estimated $14.5 billion in ill-gotten gains. Nor could Beijing control the Bo Xilai narrative a year earlier. Authorities wanted the masses to be enraged by the Chongqing Communist Party chief's disloyalty to the memory of Mao Zedong.

But all Chinese could talk about was how a modestly paid civil servant was living the high life and sending his son to Harvard. Or how Bo's extended family, according to the New York Times, quietly amassed a $160 million fortune.

Such tales are toxic for a ruling party that's become communist in name only. Bloomberg's website has been offline in China since 2012 after an expose on the estimated $376 million amassed by Xi's own family. Average Chinese are becoming savvier about the insider trading, land grabs and old-fashioned rent seeking that enriches government officials and their cronies. They're starting to realize that the "Chinese Dream" President Xi waxes on about may hold true for the 1 percent only.
That's making Xi's reform drive even more difficult.

The BCG figures are a stark reminder of the roadblocks to expanding China's services sector and reducing the role of exports and excessive investment. Think about the nature of China's recent wealth gains. From the U.S. to Southeast Asia, wealth creation has been driven by stock-market rallies. In China, the windfall has been fueled by shadow-banking vehicles like trusts, the value of which surged 81.5 percent in 2013.

How does Xi rein in this financing monster when it's enriching the very people whose cooperation he needs to retool the economy? It's hard enough to tell Chinese to accept slowing growth. How does he tell fellow officials and well-connected power brokers that they must take a bath on their trust investments in order to limit broader risks to the financial system?

More likely, this huge vulnerability will go unchecked. Xi wants to pull off a Deng 2.0, setting China on a new, more sustainable growth path. But it's the millionaires who may ultimately decide if China stops borrowing and building its way to insolvency. And their ranks are swelling as we speak.

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