By Stella Yifan Xie 

Fallout from the Covid-19 pandemic is widening the gap between haves and have-nots in China, a trend that could bring social tensions and undermine the country's stronger-than-expected economic recovery.

As in the U.S., higher-income earners have for the most part held on to their jobs in China this year, while their stock and property assets kept growing in value.

Yet many of the country's hundreds of millions of lower-income earners continue to suffer from lost work or diminished wages, and often lack welfare benefits or assets to fall back on.

" Like the U.S., the recovery in China follows a K-shaped trajectory," said Tommy Wu, a Hong Kong-based senior economist at Oxford Economics. "It's almost certain that Covid has worsened income and wealth inequality in China."

Liu Ruguo, 53, still hasn't returned to the Dongguan shoe factory where he worked since leaving in February, when the coronavirus was spreading fast in China. His family's lone breadwinner, with sons aged 29 and 23, he used to earn as much as $590 a month making shoe soles, counting overtime. The company owner hasn't been able to pay several months of salary owed to him, even though production resumed last month.

Now Mr. Liu earns up to around $295 a month chopping trees in his hometown in Hunan province. Lacking unemployment insurance, he said his family is trying to save money by eating less pork, the price of which has soared in China.

"It's been difficult to find a job elsewhere this year because of the virus, but what can you do about that?" he said.

On the other end of the social divide, Wu Weijue, a 32-year-old full-time investor living in Shenzhen with his wife and three children, has seen little downside from the pandemic. He says he made about 10% in gains from investments in bitcoin and stocks since the beginning of the year. He put down a $283,000 deposit for a 200-square-meter apartment in June.

"Even though the [property] bubble is quite big, I bought it anyway," he said.

A wider income gap matters for several reasons. While there are no signs of serious unrest in China, Communist Party leaders have long worried that the spectacle of some people doing very well while others don't could threaten social stability.

Also, despite their lower incomes, poorer residents make up a big part of China's $6 trillion consumer market. Although consumption has strengthened in China recently, it has lagged behind other parts of the economy since the pandemic began, and could weigh on growth if more families don't see incomes rebound.

Tourism revenue during the recent eight-day Golden Week national holiday was down 30% from 2019, Chinese government data show, defying expectations of a smaller drop-off given pent-up demand and a holiday that was one day longer than last year's. While sales of luxury goods such as premium cars have done well in recent months, other categories, such as furniture or catering services, haven't.

Overall, retail sales are largely expected to contract for the whole year, though they grew by 3.3% in September compared with a year earlier.

Gan Li, a professor of economics at Texas A&M University, said that weak spending by poorer households could create a vicious cycle, in which flagging demand hurts the same small businesses that employ many low-income earners.

"If more small businesses remain closed as a result of weak demand, it can cause permanent damage to China's economy that we haven't seen before," Mr. Gan said.

China's Communist revolution was built in large part on the idea of uplifting the poor and leveling inequality. While market reforms in the 1990s and 2000s unleashed economic growth and lifted hundreds of millions of people out of poverty, they also resulted in a more unequal distribution of wealth, adding to Beijing's anxiety about possible social problems.

By 2013, China was among the world's most unequal countries, according to the International Monetary Fund. The top 1% of households owned about one-third of China's wealth, while the bottom 25% had only 1%, according to a 2015 Peking University study.

China's official Gini coefficient, a measure of income inequality, has improved modestly since Xi Jinping took power in 2012 and began cracking down on corruption. His government has also spent billions of dollars on a signature goal of eliminating poverty by the end of this year, with enormous investments in rural medical care, infrastructure and other basic services.

But analysts have long questioned the accuracy of the data, which only goes through 2019, in part because China's richest people tend to underreport real income. In May, Premier Li Keqiang said some 600 million people earn only about $140 a month.

More recent data point to a reversal in the wealth gap this year, as more lower-income families struggle with the pandemic's ripple effects.

Growth in average incomes for the country's 290 million migrant workers in the second quarter was 6.7% below the same period last year, indicating a "severe and long-lasting impact," according to Nomura. Migrant workers' incomes rebounded slightly in the third quarter. Wei He, an analyst at Gavekal Research, estimates that China's bottom 60% of households lost about $200 billion in income during the first half of 2020.

Surveys by Ant Group Co. and China Household Finance Survey, a research institute, also found drops in wealth for poor families in the first half of this year, while families with higher incomes reported gains.

China added 145 new billionaires between the start of 2019 and July 2020, according to a report by UBS Group AG and PricewaterhouseCoopers LLP. A ranking of China's richest individuals, released this week by the Hurun Research Institute, found 2,398 people had wealth of at least 2 billion yuan, the equivalent of about $300 million, in 2020 -- up 32% on the previous year. China's richest cohort gained more wealth this year than in any other in the Hurun list's 22-year history, bolstered by a stock-market boom and a wave of new listings.

Part of the problem in China is that it never developed as comprehensive an unemployment insurance program as those in the U.S. and Europe. That leads many families to save more to tide themselves over in bad times.

Others are turning to borrowing. Chinese families are more indebted now than ever, with the country's household leverage ratio, a measure of household debt as a percentage of gross domestic product, climbing to a record 59.7% in June, according to data from Wind Info. That is lower than in the U.S., but the rate of increase in recent years has left some economists troubled.

To help offset pain from the pandemic and to fuel spending, the government has funded consumer vouchers for restaurants and other businesses, and offered subsidies and tax breaks to employers so they don't lay off workers.

But Chinese leaders have resisted going too far in distributing wealth directly to households, partly because some officials believe this is a less effective way to get growth compared with government-led investments, said a person familiar with their thinking.

Michael Pettis, a professor of finance at Peking University, questions that strategy, which he says could leave China relying more heavily on public investment and real-estate development for growth. That could drive China's overall debt, already above 300% of GDP, even higher.

"What [the government] really should focus on is increase the income of ordinary people," he said.

That includes people like Li Jintao, a 30-year-old interior construction worker from Hubei province, where the coronavirus first emerged. He said his monthly income has declined by about one-third, even though he's doing the same type of jobs since May.

He said he no longer eats at restaurants and takes slow trains when going to other cities for work, sometimes a 12-hour journey, instead of the much faster bullet trains for which tickets can often cost three times more.

China's economy may be enjoying a solid recovery, but "I don't think I can save any money this year," Mr. Li said.

Write to Stella Yifan Xie at stella.xie@wsj.com

 

(END) Dow Jones Newswires

October 21, 2020 08:15 ET (12:15 GMT)

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