Expanding middle-income earners key to long-term growth

Among a population of more than 1.4 billion in China, there are more than 400 million middle-income earners — a massive demographic indeed. But to further tap the advantage of China having such a colossal consumer base — or in other words, market potential — and fully unleash consumption demand to better drive the nation's economic growth, it is necessary to continue to expand the ranks of middle-income earners to achieve a more well-rounded and balanced social structure having a large middle-income group and small high-income and lower-income groups. The formation of such a structure is also a milestone that China is aiming for amid its quest for common prosperity.

The key to realizing such a formation, as we see things, lies in the upgrading of social mobility.

Taking shape

Since China's reform and opening-up, the horizontal mobility of the population has been significantly enhanced, including that across urban and rural areas, provinces, industries, occupations, enterprises and geographic regions. In particular, the urban-rural mobility of labor has made a huge contribution not only to the improvement of rural incomes, but also to overall economic growth in the past few decades. Seen from this perspective, China already features a highly mobile society in terms of population and labor force.

Although incomes of both urban and rural residents have maintained relatively rapid growth in recent years, there is still a gap between the two, as measured by the country's Gini coefficient. One important reason we see for the income gap is lagging development of vertical mobility in China, which hinders the nation's building of a more equitable social structure. Building a ladder for lower-income earners to acquire better education, occupation and higher incomes still has a long way to go.

In addition, the middle-income group, said the National Bureau of Statistics, has some 400 million consumers. Considering the total population of more than 1.4 billion, the size of the middle-income group is still not large enough. Middle-income households consisting of two parents and one child earn on average between 100,000 yuan ($14,050) and 500,000 yuan annually. Such earners are still mainly urban residents, and as a group have yet to form a large consumer base strong enough to better drive the economy. This also reflects that the well-rounded social structure has not yet been formed.

Restraining factors

So what is keeping the development of China's social mobility from playing its role of pushing forward the formation of a well-rounded society?

In the early years after reform and opening-up, horizontal mobility in China was very smooth, thanks to the rapid economic growth rate, rapidly developing education system and timely adjustments in the industrial structure. There were such vast opportunities in the market that when certain groups of people enjoyed development opportunities, other groups didn't see much downside impact. However, when economic growth slows, social mobility, especially of a horizontal nature, tends to slow as well. That is because under such circumstances, social mobility will generate "zero-sum" results to some extent, as seizing of opportunities by some groups may affect or even harm others. Therefore, in general, slower economic growth has a negative impact on social mobility.

At the same time, China is facing a rapidly aging society. In 2021, the country's population growth rate — the natural growth rate after comprehensively considering births and deaths — is 0.34 per thousand, and is likely to reach zero growth this year. Also, the proportion of elderly people aged 65 and over among the total reached 14.2 percent in 2021.With the above figures and according to international standards, China as a matter of fact has officially become an aging society.

An aging society will also slow down social mobility. Seen from the perspective of individuals, as people age, they tend to pursue fewer occupational, residential and lifestyle changes, which will diminish horizontal mobility and push the macroeconomic structure of society toward an aging society. From a social point of view, an aging society will have to adapt to changes to form an elderly-friendly environment, including that of employment, entrepreneurship and living conditions, which may take longer than desired. Social mobility is also affected by an aging society as such.

It is noteworthy that a declining economic growth rate is in line with the law of changes in the development stage. Aging is an irreversible trend, and the effect of reducing social mobility to a certain extent is inevitable. However, by removing various obstacles in social and economic operations, there are still many opportunities in China to promote social mobility.

Policy support

Regardless of naturally restraining factors, how can policies be better implemented to promote social mobility and as a result help drive momentum?

First, the government should keep promoting social mobility by deepening reforms and institutional building. At the current stage of development and at a time when the nation faces disruptions from the COVID-19 pandemic and external uncertainties, policymakers should carry out reforms that will clearly bring about increasing returns and lead to the removal of various institutional obstacles that hinder economic growth, income growth and social mobility.

With the goal of basically achieving socialist modernization by 2035, China in the next 13 years will be at an important period where its each step of deepening reform of the economic system, adjusting social policies and promoting system construction is crucial to the nation's prospects. China is also trying to lift its per capita GDP from the $12,000 level to $23,000, which has already been achieved in developed nations. Accordingly, the level of social mobility that the nation is supposed to achieve should also be lifted to the developed stage. Specifically, primary distribution, redistribution and tertiary distribution, in addition to playing their respective roles in the economic system, should be well integrated and function as a whole to promote social mobility.

Second, China should, on one hand, continue to promote its new-type urbanization, and at the same time promote the transfer of additional rural labor to urban areas. Meanwhile, the country should facilitate its urban registration for rural migrant workers to expand the middle-income group.

In this way, reform dividends can be created from both supply and demand sides. From the supply side, it is possible to increase the supply of nonagricultural labor, increase the labor participation rate and promote the reallocation of resources to increase productivity, all of which can increase the economic growth rate. From the demand side, by increasing residential incomes, narrowing the income gap and alleviating socioeconomic worries, consumption can be expanded so as to unleash the true market potential that China possesses.

Redistribution should be intensified while government social spending should be expanded. By observing figures of reference nations, one can find that along with increases in per capita incomes and per capita GDP, government spending — especially government social spending — will also make up a larger proportion in the GDP, thus reflecting its role in effectively driving growth. Following this, the government should also further expand social spending as a key way to upgrade the redistribution system, boost public services and improve people's livelihood.

Last but not least, tertiary distribution should be gradually enhanced as an important supplement to primary distribution and redistribution so as to involve more individuals, enterprises and industries. Also, as a means of resource reallocation, tertiary distribution will undoubtedly lead to more achievements by both individuals and enterprises in more fields. Promotion of such distribution can be done via sectors such as philanthropy, volunteer activities, corporate social responsibility and more.

The writer is the chief expert of the National High-end Think Tank at the Chinese Academy of Social Sciences. The article is an op-ed by the writer for the China Finance 40 Forum, a think tank.

The views don't necessarily reflect those of China Daily.