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The $1 trillion Chinese mattress

The $1 trillion Chinese mattress

Now that’s one big mattress. Last week, a Credit Suisse study showed China’s households hide as much as ¥9.3 trillion of income not reported in official figures—80% of it by the nation’s wealthiest. This massive pile of stashed cash equals some 30% of China’s gross domestic product.

The good news: This lends credence to the domestic demand story for Chinese growth. It turns out, the average urban disposable household income is ¥32,154, or 90% more than official figures. The bad: China’s rich-poor gap may be much bigger than we realize. Its Gini coefficient, a statistical measure of wealth equality, has long been too high. In May, the Economic Information Daily, a government-affiliated newspaper, said the figure reached 0.47, higher than the recognized warning level of 0.4.

Things may be far worse in the world’s most populous nation. A widening wealth disparity will lead to trouble for 1.3 billion Chinese and investors betting on stability in the second largest economy in the world.

Nothing spooks the Communist Party like social unrest. Its conviction to snuff it out was behind the ¥4 trillion stimulus package in 2008. Reducing income disparities is a top goal of President Hu Jintao and Premier Wen Jiabao to stave off riots, strikes and other unrest that might threaten the party’s six-decade rule.

The risk is that they may start believing their own press. The story getting the most mileage is China’s economic brawn. Its $2.5 trillion of currency reserves is viewed as a nice insurance policy against trouble in markets. News that China bought $20 billion more Japanese bonds than it sold in the first half of 2010, the fastest pace of purchases in at least five years, is seen as a passing of the torch in Asia.

In a way, it is. Japanese officials have done a poor job of disguising their glee over China supporting their debt. Government and Bank of Japan officials are concerned about their own nation’s ability to finance a widening budget deficit. The desperation was fairly clear in a recent advertising campaign that suggested Japanese women are attracted to guys who invest in government bonds.

Yet China’s fragilities need tending to, and now, if its development is to be sustainable. The condition of its state-owned banks is a concern for investors, and rightfully so. China plans to stress-test banks to assess how a big drop in property prices would affect the financial system. Officials should make sure the process is more thorough and transparent than in the US, Europe or Japan.

Social unrest is a bigger risk. Much of China’s hidden income may be illegal or quasi-illegal, according to the Credit Suisse study. It should be no surprise that a nation growing 10% has a healthy grey economy running in parallel. That’s what happens when an all-powerful, top-down government mixes with vast supplies of capital. Crony capital thrives.

This corruption comes at a price. The inefficiencies it breeds feed disparities in economic opportunities, income and distribution of assets such as property. Just ask the folks at Toyota and Honda dealing with strikes and demands for higher wages.

The most dangerous aspect of China’s trajectory is how, well, American it looks. The concentration of wealth among the richest helps explain a surge in spending on luxury goods. As Japanese sales wane, posh brands can’t open Chinese stores fast enough.

China’s social fabric is under pressure. Employee suicides at Foxconn Technology Group are a case in point. So is the spate of deadly attacks on schoolchildren, which, reports suggest, are related to grievances with local governments.

China has done a remarkable job raising living standards for millions. The reason it gets so much attention and investment is genuine progress. China is leaving India far behind in tackling poverty. Now its wealth balance is heading in the wrong direction.

You can censor Google’s search engine. You can’t hide the fact that a handful of Chinese are getting very rich from the billion-plus workers being left behind. Anger will rise, tempers will flare and things could get out of control. Try stuffing that under a mattress.

William Pesek is a Bloomberg columnist.

Edited excerpts. Comments are welcome at

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