China’s Fragile Middle Class

In China, even the middle class faces enormous economic pressure. Because China’s economic system leans heavily toward state-owned enterprises, the government artificially suppresses deposit interest rates, causing residents’ savings to continuously lose value, while what fuels large-scale government investment behind the scenes is exactly those household savings. In the words of Carl E. Walter, author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” this system “sacrifices the interests of ordinary household depositors to benefit state-owned enterprises.” Experts call this system state capitalism: it relies on transferring the wealth of ordinary Chinese households into the hands of state-owned banks, government-backed enterprises, and the small number of wealthy individuals closely tied to this system who profit from it. Middle-class households cannot enjoy the full fruits of China’s economic miracle. Economist Nicholas R. Lardy calculated that in 2008 alone, the result of government policy amounted to an implicit tax of roughly $36 billion on ordinary Chinese households, equivalent to 4% of China’s GNP. Over the past decade, the total implicit tax may have reached hundreds of billions of dollars — money effectively taken by the banks from consumers.