Last Song of Wen Jiabao

Source article in Chinese: 温家宝的政治绝唱
By He Qinglian on October 23, 2012

In March next year, Wen Jiabao, the sixth premier of the CPC regime, would retire from his position in the “Two Meetings”. Taking into account that the “Golden Decade” received more criticism than praise both at home and in Chinese communities abroad, Premier Wen finally decided to officially present in this December the “Overall Strategy of Income Distribution Reform”, which has been “studied and discussed” for a whole eight years, and use it as the last song to mark the end of his political career—and to leave behind a legacy that the people would fondly remember.

Wen’s ideas are probably that: more and more Chinese people have come to feel worried about corruption, wealth disparity and food safety issues, and he as the outgoing Premier might be able to do little about corruption and food safety, then perhaps he could do something that would benefit the public—even if that is nothing more than a blueprint, it would more or less make him appear to be a good Premier that cares for the people.

The main themes of the Income Distribution Reform this time are to raise the income level of the low-income group, regulate the high revenue of monopoly industries, and enable more people to become members of the middle class, so as to gradually transform the Chinese society into an “olive-shaped” one. Since what Wen has in mind is only an “Overall Strategy”, its implementation would take a very specific planning. And this would be up to Wen’s successor Li Keqiang to take his time and work out the details as there are less than three months left between the time the “Overall Strategy” is made public and the time Wen’s office term ends.

The regulation of income distribution, the narrowing of the wealth gap are the theme songs in the “Two Meetings” each year during the decade Wen serves as the Premier. They are the dreams of Wen Jiabao and the Chinese people are very familiar with them. However, over 98% of what Chinese political leaders promised and envisioned did not come true. While the Chinese government continuously makes announcements that it would implement income distribution reform, in reality it is a completely different story. Those with high income saw their income become higher and higher, the number of those with low income is growing increasingly larger, and the middle class find the days are getting harder and harder. The issue of “gray income” has repeatedly been raised in the documents of the Central Commission for Discipline Inspection, which had little effect on officials who take bribes usually in the hundreds of millions. This is a regret of Wen and that is why he makes the endeavor to turn the “Overall Strategy” into something more concrete before his term ends. Rather than assuming that Wen truly wants the Strategy to be implemented, it would be more accurate to say that he means only to let the Chinese people and the entire world see that he cares about the livelihood of the people.

Why do I say this? That’s because income distribution reform is an institutional project that is directly related to the distribution of benefits and is very broad in scope. If the economy continues to develop rapidly, and the “cake” keeps becoming larger, it would naturally be easier to adjust the income distribution. But now with China’s economic recession becoming a certainty and even the government proclaims to “take the lead” to practice strict economy, it is somewhat ill-timed and not reasonable to present the Strategy now, and the decision makes people wonder. In the “golden decade” that Wen is in charge, it took a whole eight years to study and contemplate the Strategy. Now he unveils it when there is only three months left before his term expires and leaves the responsibility of implementing it to the next Premier. What sort of responsible official is that?

In modern countries, when it comes to income distribution reform, the core contents would be nothing other than the following three items: the government cuts taxes; the business owners concede some benefits; and the workers get a pay raise so that the benefit distribution structure between the three parties would become reasonable. And for the case of China, there would be another item on top of the three: crack down on corrupt officials, confiscate their illegal earnings and use that money to improve the welfare of the people.

Inferred from the current economic situation, the next government that is soon to take over does not meet such conditions because of the reasons below.

First, it is extremely unlikely that the government would cut taxes. Just two months ago, various local governments sought every possible way to raise tax revenue as the growth rates of the tax revenue faltered and their finance came under pressure. Local governments like the one in Shenyang did so using the pretext of “crackdown on counterfeit goods” and heavily penalized businesses; other local governments handed down charges arbitrarily, or chased back “evaded taxes” in another means, and forced enterprises out of business as a result; yet some other local governments simply collect taxes in advance, as in the case of a region in Hunan province, where the businesses were told to pay taxes of the next several years in advance.

Perhaps some might say that the incoming government would carry out reform and stop collecting taxes in such manners. To those who have this wish I would have to pour cold water. To expect a government to reduce taxes, we should first look at whether or not it admits the tax burden to be too heavy. A survey found that in average, the tax burden of Chinese enterprises is more than 40% of their profits. Various taxes are collected including value-added tax, urban maintenance and construction tax, education surcharge, stamp duty, property tax, vehicle and vessel usage tax, urban land use tax, corporate income tax and others. The value-added tax alone accounts for 10% of companies’ turnover, not to mention other surcharges, water conservancy fund, employee education fund and, in addition to the allowance for persons with disabilities, the “five insurances and one fund”—pension insurance, medical insurance, unemployment insurance, industrial injury insurance, maternity insurance and housing provident fund—that corporations have to pay for their employees. All these together cost about 30-40% of enterprises’ operating income. In Forbes Global Tax Misery Index 2009, China ranked second with a score of 160. The authenticity of that Index was repeatedly rejected by the Chinese government, which argued the macro tax burden in China is not high, and the subtext behind this argument is that there is room to raise taxes.

Second, the near impossibility of business owners conceding benefits. In China business owners are of the following categories: state-owned enterprises, foreign investment, and private capital. Currently, state-owned enterprises such as Sinopec, PetroChina, and CNOOC and China Unicom, China Mobile, China Railcom, China Netcom, China Telecom of the communications industry enjoy stable profits because of their monopolies. Yet manufacturers of foreign investment, predominantly of Hong Kong and Taiwan, have been caught in a difficult situation because of the meager turnovers, they have either moved out or shut down their businesses; and capitals from Europe and the US are leaving China to invest back home. Small- and medium-sized enterprises of the two economically developed regions of China—the Yangtze River Delta and the Pearl River Delta—have experienced two rounds of mass closure since 2008. While the Chinese government claimed there has been no mass closure of businesses, China Federation of Industry and Commerce published a report in 2011 that said it was far harder for the SMEs to stay afloat than in 2008.

Except for the giant state-owned monopolies, the majority of the enterprises in China are struggling to stay in business. How then could corporate owners concede benefits anyway? If the pressure mounts too greatly, these companies may just choose to close down and put an end to their troubles once and for all.

Third, increase in workers’ wages unlikely to happen. The low wages of Chinese workers has long been a subject of criticism. Even in the years when the Chinese economy grew at a double-digit rate annually, the workers’ wages were artificially lowered. Now with enterprises facing difficulties to stay open, carrying heavy tax burden and may have fork out more money to pay the various “evaded” taxes the local governments intend to “collect”, there is no possibility that they could raise the wages of the workers.

Now that China does not have the social conditions needed for an income distribution reform at this moment and over the next few years, Premier Wen insists to bring about this “Overall Strategy” before he steps down, what exactly his intention is? There could only be one answer: Wen intends to use that reform as the swan song at his curtain call. For his successor, this is a political entrustment; for the people of China, this is the proof that he has done his job to care for them. Whether the next government would carry out what he unveils, and to what degree if at all, is not something that Wen could control.