John Schoen
A farmer tends to the fall harvest in rural Sichuan province.
Image: John Schoen
By John W. Schoen Senior Producer
updated 10/20/2010 10:36:34 AM ET 2010-10-20T14:36:34

For centuries, visitors to this provincial capital in southwestern China have been drawn to the broad, open plaza at Tianfu Square, the bull's-eye at the center of the city's three modern, expansive ring roads.

Some people come to sit and relax near the 40-foot marble statue of Chairman Mao Zedong, his 14-ton right arm raised in a frozen wave to the crowd below. Others stroll past neatly manicured gardens or take in one of the square's "musical fountain" water shows.

They also come to shop.

In bright, new malls conveniently located within a few blocks of the square, the world's top luxury brands are on display — everything from Armani to Zegna.

Liang Shumei works as a sales clerk at the local Gucci store. Business is brisk. Her best customers, she told a recent visitor, are builders, business owners and home decorators.  Since she moved here six years ago from northeast China, those customers have grown much richer.

“In 2006, 6,000 yuan ($900) was a lot for them to spend,” she said. “Today 60,000 yuan ($9,000) is not that much.”

For all but a handful of China’s 1.3 billion people, 60,000 yuan is still serious money: roughly four years' salary for the average urban household. The widening wealth gap has presented this country’s ruling party with a China-sized quandary.

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“Wealth is not evenly divided,” said K.C. Kwok, an economist at the University of Hong Kong. “And that is a major problem in China. You have people buying Gucci and Prada, and yet a lot of people are making a very humble living.”

The speed of China's wealth creation has been historic. Economic reforms, begun after the failed policies of the Cultural Revolution brought economic collapse in the 1970s, have lifted hundreds of millions of people from poverty. Per capita income doubled from 1991 to 2001, and then doubled again by 2008, according to the University of Michigan’s China Data Center.

China’s 30-year economic boom has transformed its coastal cities and brought a marked increase in the standard of living of urban residents. But China’s rural households, especially in inland and western regions, have largely been left behind. In 2008, a typical rural family lived on less than $2 a day, according to the China Data Center.

Economic opportunity is also limited by the Chinese household registration system, or hukou, which officially designates most citizens' place of residence. With jobs scarce in rural areas, more than 150 million people have moved to China’s cities in what is considered the largest peacetime migration in history.

But without approved registration in their new home city, many of those migrants are “floaters” who lose out on locally administered subsidies for education, health care and housing. That's left many rural residents with a difficult choice: remain at home where jobs are scare, or move to a city without registration and pay out of pocket for those services.

Chinese officials also are grappling with how to better serve a large population of children whose migrant parents have left them behind with family members or friends. These “left behind” kids are more prone to emotional, behavioral and learning problems, according to China Labor Bulletin, a Hong Kong-based non-governmental group.

Tensions over wage inequities flared this year, sparking police clashes with striking auto workers and protests over a string of suicides at electronics manufacturer Foxconn. Some  strikes were settled with agreements to raise wages.

“I’m very worried about the wealth gap and the potential for social crises,” said Fan Gang, director of the China’s National Economic Research Institute.

Higher wages may help maintain social order, but they strike at the heart of the business plan that has propelled China’s development for the past 30 years. Manufacturers are under pressure to find cheaper labor, said Lawrence J. Lau, a Hong Kong economist and former vice chancellor of The Chinese University of Hong Kong.

“If an iPhone sells for $300 in the U.S., a contract manufacturer like Foxconn will only take in $10,” he said. “So if your wage rate is going up, and the yuan is appreciating, that’s going to wipe out the profit margin. In four years, you will not see many of these assembly plants.”

The hope is that higher wages for Chinese workers will provide them with the income they need to increase domestic consumer demand. That, in turn, would help diversify China's economy away from reliance on lower-wage factories turning out cheap exports.

Chinese consumers who already have disposable income are on a roll; retail sales are growing by 14 to 16 percent a year, China last year surpassed the U.S. as the world’s largest car market. In urban areas, real estate prices are soaring as young families, with their parents' help, buy homes and investors snap up multiple properties. The boom has raised concerns about a real estate bubble.

Millions of mainlanders are flocking across the strait to Hong Kong, where they find a shopper’s paradise.

"Chinese tourists are heavy spenders,” said Kwok. “The first thing they do when they wake up in the morning is eat, eat, eat — and then they go shop."

But for all the money flowing to China’s new middle class and wealthy elite, much of the population still lives in or near poverty.

Some officials say the widening wealth gap is just a temporary phase that was anticipated 30 years ago by China's then-leader Deng Xiaoping when the government launched the country on a path toward capitalism - even as it retained control over the allocation of capital, human and natural resources.

"To get rich is glorious," Deng said. But that glory would first shine on only a few.

“Deng said that some of the people would be wealthy before others, and then others will be wealthy later,” said Yang Shi Zuo, executive deputy director of West China development for the Sichuan government. “Now the coastal areas are already wealthy, ... so they should serve western China to be wealthy ... and finally we can reach common wealth." 

Chinese officials acknowledge that won’t be easy.

“In 10 years, China will still be a developing country,” said Lu Kang, deputy director general at the Ministry of Foreign Affairs’ Department of North American and Oceanic Affairs. Overall, standards of living will continue to improve, he said.

“But the rural areas are totally different," he said. "That’s not something that we can solve in the next decade.”

Chinese leaders are counting on rising incomes and standards of living to help maintain the social order — and the government’s grip on power. But higher incomes are critical to a second component of China 2.0: increasing domestic consumer spending to wean the economy off its heavy reliance on exports for growth.

Chinese officials and business leaders often point to the power of multiplying any number by 1.3 billion. A relatively small increase in each household’s consumer spending can have a big impact on the overall economy.

But consumer spending still makes up only 35 percent of China’s $5 trillion GDP. By comparison, consumer spending contributes roughly two-thirds of the $14 trillion U.S. GDP.

As household incomes in China rise, it’s not clear that Chinese people will spend conspicuously like people in the developed world do. Chinese culture has a long history of valuing thrift and hard work. "Be the first to the field and the last to the sofa," goes the old Chinese proverb.

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At the Gucci store in Chengdu, sales clerk Liang Shumei says her wealthy customers like to pay cash to show off their riches.

“But they are not quality," she said. "They have not been to university.”

But doesn’t all that wealth make them successful?

“They think they are successful, but they don’t have knowledge,” said Liang. “I think you don’t have to spend a lot of money to be successful. You can help your city or your country or other people or someone who is poor. That’s what I think is successful.”

NEXT: The price of development

Reporting for this series was done as part of the first China-United States Journalists Exchange, a field-study trip sponsored jointly by the East West Center, the Better Hong Kong Foundation and the All China Journalists Association.  The two-week trip included dozens of meetings with government, business and academic leaders in Hong Kong, Beijing, Chengdu and  areas damaged by the 2008 Sichuan earthquake.

Photos: China 2.0 - Economic transformation

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  1. China 2.0

    A guard stands sentry overlooking Tiananmen Square in Beijing. Three decades after the failed policies of Mao Zedong's Cultural Revolution brought economic collapse, China has caught up with Japan to become the world's second-largest economy. But as it enters a new phase of growth, the Chinese government faces a new set of challenges. (John Schoen / Back to slideshow navigation
  2. The way West

    The Great Wall, one of the greatest engineering projects ever built, stretches west. China has embarked on a massive new infrastructure program designed to spread the breakneck economic growth of its coastal cities to inland and western regions. (John Schoen / Back to slideshow navigation
  3. Panda power

    A growing panda consumes between 15 to 30 kilograms of bamboo every day in the Wolong National Nature Reserve in western Sichuan, a popular tourist attraction. The government is encouraging newly wealthy Chinese to travel more as part of a plan to boost domestic spending. (John Schoen / Back to slideshow navigation
  4. Wealth gap

    Shoppers search for low prices at a Wal-Mart store in the New World Shopping Center in Beijing. China's red-hot economy has raised the living standards of urban households. But hundreds of millions of rural workers earn roughly $2 a day. (John Schoen / Back to slideshow navigation
  5. Building the New China

    A laborer in Chengdu works on a new sewer system, part of a multibillion-dollar investment in new roads, railways, power and water lines. China's rapid industrialization has created a long list of environmental hazards that will be costly to clean up. (John Schoen / Back to slideshow navigation
  6. Property wealth

    A farmer in rural Sichuan province tends to the fall harvest. Rural households recently were granted long-term leases on their property. But land reform has been plagued by corruption. (John Schoen / Back to slideshow navigation
  7. The next generation

    Like many aspiring young Chinese, Gong Da Dian, 25, who goes by the English name "Dickens," moved to the city of Chengdu looking for a better life. But it hasn't been easy. He wants to go back to school and start a computer company "if I can get enough money.” (John Schoen / Back to slideshow navigation
  8. Learning to innovate

    At Deyang Primary School No. 1, students assemble in light, airy rooms surrounding a quiet courtyard. Classes can include as many as 70 students. To create new technology and high-wage jobs, China is spending heavily on education. (John Schoen / Back to slideshow navigation
  9. Designing their future

    A worker at an art company in western Sichuan province creates traditional Chinese paintings. The government is working to create jobs in rural areas, where employment opportunities are scarce. (John Schoen / Back to slideshow navigation
  10. On the move

    Three years ago, He Yue moved to Chengdu in Sichuan province to find "a better opportunity." She now works as a travel agent and business is brisk. "Chinese people used to travel once a year," she said. "Now they travel two or three times a year." (John Schoen / Back to slideshow navigation
  11. Recovery and rebuilding

    A photo is left as a memorial to victims of the Sichaun earthquake of 2008, which killed nearly 70,000 people and left millions homeless. The government committed more than $400 million to the relief and rebuilding effort. (John Schoen / Back to slideshow navigation
  12. Road to Somewhere

    Though China's coastal cities are choked with traffic, some new highways like this one in Sichuan province are virtually empty. China's leaders are hoping an expanded network of roads, high-speed railways, airports and data links will spur growth in western and inland regions, where economic gains have lagged coastal cities. (John Schoen / Back to slideshow navigation
  13. Slow, steady recovery

    You Zhoubao was at home when the Sichuan earthquake struck in 2008, collapsing his home and severing his left leg above the knee. Two years after the disaster, victims are still being treated at a local clinic sponsored by the Hong Kong Red Cross. (John Schoen / Back to slideshow navigation
  14. Growth takes a toll

    Stockbroker Zai Shasha helps her customers navigate the burgeoning Chinese stock market. Rapid urban development has helped boost investment returns for her customers. But growth also has created "some sorrows," she said. "The traffic is bad, and the air is terrible." (John Schoen / Back to slideshow navigation
  15. Relaxing by the river

    Visitors to Chengdu's riverwalk enjoy a little relief from a hot September day. People in this provincial capital proudly say they enjoy a "more relaxed" lifestyle than friends and family in China's bustling coastal cities. (John Schoen / Back to slideshow navigation
  16. Hazy outlook

    Air pollution is a serious problem for Chinese cities, including western provincial capitals like Chengdu. Only 1 percent of the country’s 560 million urban resident breathe air considered safe by the European Union, according to the World Bank. (John Schoen / Back to slideshow navigation
  17. Hong Kong: the capitol of capital

    Shoppers flock to Hong Kong from mainland China to spend some of their new wealth. The city also draws investors hoping to profit from heavy investment in the next phase of China's economic development. (John Schoen / Back to slideshow navigation
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