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Financial Sector’s Role in Achieving Common Prosperity

Nov 10-2021   



The financial sector supports the realization of common prosperity largely through its role in the first income distribution, says Prof. Huang Yiping, Associate Dean of the NSD and Director of the Institute of Digital Finance at PKU.

 

The first income distribution is regulated by the market; therefore, it can be improved through better use of the financial market, says Prof. Huang. Three areas deserve particular attention: the deepening of financial reforms, the further marketization of the financial industry, and the development of inclusive finance.

 

For years, the Chinese economy has been beset by lackluster consumption, which in turn results from unequal income distribution. Consumption took up 64% of China’s GDP in 2000, a figure that slid to 49% in 2010 before edging up to 56% in 2019. In comparison, the ratio ranges from 82% in the US and 78% in France to 72% in India. For Prof. Huang, consumption should reach an appropriate level in relation to investment to avoid either insufficiency or excess of the two.

 

The perennially weak consumption can be traced to inequality in income distribution, which is reflected by China’s high Gini index of around 0.48. Much in line with the concept of Average Propensity to Consume (APC), the high earners possess a big share of social wealth but don’t consume proportionally, while the low-income group desires to spend more but is hamstrung by inadequate income. Other forces are also at play. Prof. Huang cites research findings that show an increase of 27% in per capita consumption of migrant workers if they were granted urban residence permits.

 

Deeping financial reforms, the first advice of Prof. Huang, will effectively bolster high-quality economic development, which forms an essential prerequisite for achieving common prosperity. Despite its contributions to the rapid economic growth over the last four decades, China’s financial system has seen its efficiency dwindling, as evidenced by the increase in its incremental capital-output ratio (ICOR). The transformation of economic growth mode – from extensive and factor input-driven to intensive and innovation-driven – demands concurrent changes in the financial system.

 

Prof. Huang also argues for further promoting the marketization of the financial market, especially the marketization of factor prices, believing that it will improve financial returns and increase the resident’s income from property. In addition, he advises taking advantage of digital technology to develop inclusive finance with the aim of helping individuals and medium, small, and micro-sized enterprises to address such issues as financing, investment, and insurance.

Financial Sector’s Role in Achieving Common Prosperity

Nov 10-2021   



The financial sector supports the realization of common prosperity largely through its role in the first income distribution, says Prof. Huang Yiping, Associate Dean of the NSD and Director of the Institute of Digital Finance at PKU.

 

The first income distribution is regulated by the market; therefore, it can be improved through better use of the financial market, says Prof. Huang. Three areas deserve particular attention: the deepening of financial reforms, the further marketization of the financial industry, and the development of inclusive finance.

 

For years, the Chinese economy has been beset by lackluster consumption, which in turn results from unequal income distribution. Consumption took up 64% of China’s GDP in 2000, a figure that slid to 49% in 2010 before edging up to 56% in 2019. In comparison, the ratio ranges from 82% in the US and 78% in France to 72% in India. For Prof. Huang, consumption should reach an appropriate level in relation to investment to avoid either insufficiency or excess of the two.

 

The perennially weak consumption can be traced to inequality in income distribution, which is reflected by China’s high Gini index of around 0.48. Much in line with the concept of Average Propensity to Consume (APC), the high earners possess a big share of social wealth but don’t consume proportionally, while the low-income group desires to spend more but is hamstrung by inadequate income. Other forces are also at play. Prof. Huang cites research findings that show an increase of 27% in per capita consumption of migrant workers if they were granted urban residence permits.

 

Deeping financial reforms, the first advice of Prof. Huang, will effectively bolster high-quality economic development, which forms an essential prerequisite for achieving common prosperity. Despite its contributions to the rapid economic growth over the last four decades, China’s financial system has seen its efficiency dwindling, as evidenced by the increase in its incremental capital-output ratio (ICOR). The transformation of economic growth mode – from extensive and factor input-driven to intensive and innovation-driven – demands concurrent changes in the financial system.

 

Prof. Huang also argues for further promoting the marketization of the financial market, especially the marketization of factor prices, believing that it will improve financial returns and increase the resident’s income from property. In addition, he advises taking advantage of digital technology to develop inclusive finance with the aim of helping individuals and medium, small, and micro-sized enterprises to address such issues as financing, investment, and insurance.