China’s wealthiest families score $720 billion in undeclared “gray income”

China’s wealthiest families score $720 billion in undeclared “gray income”

By Lily Kuo @lilkuo September 25, 2013

The undeclared “gray” income earned by China’s richest families has reached staggering levels, and is contributing to massive income inequality that is far worse than official statistics, according to research by the state-backed China Society of Economic Reform. CSER researcher Wang Xiaolu, writing in Caixin magazine, said gray income reached 6.2 trillion renminbi (about $1 trillion) in 2011, or about 12% of GDP, based on a survey of 5,344 families in urban areas that was completed in 2012.That means the richest 10% of urban Chinese families make almost 21 times more than the poorest 10%, versus official statistics from the National Bureau of Statistics that place the rich-to-poor income ratio at only 8.6. The Gini index for China’s urban households—which measures income distribution on a scale of 0 to 1, where the higher values mean more inequality—was 0.496 according to the CSER data, versus the NBS figure of 0.324. A Gini score over 0.4 is correlated with social instability.

“The richer the household, the more likely it receives shadow income,” Wang noted.

Even some Chinese officials admit that income inequality has been understated, because families often lie on household surveys, and China lacks a comprehensive tax record system to check those results. The government has resisted calls for officials to disclose their assets, and entrepreneurs are similarly cagey.

The upside is that families outside of that top 20% are getting a little more of that pie. The neweset figures show 72% percent of gray income went to the wealthiest 20% of families, compared with 81.3% in 2010. The downside is that this could mean corruption is spreading.

“This tells us that invisible income oozed out from the rich to cover more medium to high-income households, possibly a result of expanded corruption and weak rule of law,” Wang wrote. “The high gray income is linked to the loose credit handed out between 2009 and 2010, as well as the rapid increase of government investment during the same period. When administrative power lacks proper checks, the government intervenes in resource allocation and state money can easily be channeled out into private pockets.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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