China's great growth means widening gap between rich and poor

Yesterday, China's sovereign wealth fund, with around three trillion US Dollars in its coffers, announced it was buying a 10% chunk of the company which runs London's Heathrow Airport for £450 million pounds.

We hear a lot about China and its national wealth, last year this vast country became the world's second largest economy.

However, in wealth per capita China is ranked 121st, below East Timor and Jamaica. China is still, very much, officially a developing country, but clearly developing faster than all the others.

Double digit growth during the previous decade. The huge economic changes which Europe experienced over centuries are taking place over years, if not months. Society is developing on steroids as a result.

China's stated aim is to be a middle income nation by 2020, that means hitting a target of around 10K USD per head.

"No country has achieved middle income status without immense change" says Professor Kerry Brown, who I heard speak at an event in Beijing last week.

There's still a long way to go to reach middle income status. This year, for the first time China reached an important social milestone, just over half of the 1.3 billion population now live in urban areas.

That's a massive change, in just a couple of decades China has gone from farms and famine to an emerging middle class country.

However, don't forget half of the population is still living in rural areas; earning roughly £300 pounds a year. Those who move to the urban areas in search of a better job, often find it a tougher existence than back in the village. China's advancing economy means hundreds of millions are living between a rock and a hard place.

In the cities and towns the migrants can find work but it's never going to be enough to buy a flat and a car. Sure some people make it rich, after all Deng Xiaoping famously ushered in the switch from a controlled communist economy to opening up to capitalism with the words "to get rich is glorious".

Most, however, find themselves living in cramped accommodation, far from their jobs, with no access to decent healthcare or schools because of the Hukou system which means people can only access public services in the place they are registered, usually where they were born.

Along with corruption, the biggest danger facing the Communist Party is inequality and the two go together. There's a deep suspicion, among most of the people I have spoken to, that only those with political connections get really rich.

The concept of Guanxi or a network of connections is a well known and central aspect of life in China, both in business and social life. It's no different from the 'old boys network' in the UK.

Chinese politicians can quickly appreciate and recognise the Old Etonian bonds between Downing Street and City Hall for example. The next leaders of China, due to be appointed when the 18th Party Congress begins next week are linked through their families, their fathers fighting alongside Mao and the factions they belong to.

The risk to the state is the growing feeling of no Guanxi, no gain. Often only those with political and personal cultivated connections get handed plum jobs at state owned enterprises. The most lucrative posts are actually bought and sold within personal networks.

Richard McGregor in his excellent book 'The Party' cites the case of Li Gang, an official who paid 300,000 RMB for a position within a local government department and made five million over two years from bribes. A 1,500 percent interest rate. Nice work if you can buy it. The state tries hard to catch and prosecute corrupt officials. The problem is that the Party investigates itself, there isn't an independent watchdog.

Chinese leaders like Hu Jintao and Wen Jiabao have spent their ten years in power, which end next week, condemning corruption. Despite best stated intentions, the figures just keep rising: the number of officials being prosecuted and the amounts involved.

The danger looming for China's new leaders is the perfect storm of a growing sense of inequality, not caused by market conditions, but by a suspicion that only the political elite are getting the lion's share of China's great growth and an ever widening gap between rich and poor.

Acutely conscious of this potential threat to their continuing power the Chinese government has spent 125 billion USD over the past three years to extend health insurance coverage to 95% of the population. Local governments have been ordered to build millions of cheaper social housing.

The biggest challenge to China's new leaders is that during the march towards middle income status over the next ten years, how to ensure hundreds of millions are not left behind?