How Credit Growth Affects Income Inequality in China
ZOU Jingxian, ZHANG Bin, WEI Wei, DONG Feng
National Academy of Development and Strategy, Renmin University of China; Institute of World Economics and Politics, Chinese Academy of Social Sciences; National School of Development, Peking University; School of Economics and Management, Tsinghua University
Summary:
A common criticism of the easy monetary policy widely used in developed countries is that it increases asset prices, which asymmetrically benefits wealthy households and those working in the financial sector who own a large number of assets. Thus, it widens inequalities in income and wealth distribution. In China, there is also a widespread concern that monetary easing would worsen income and wealth distribution. Therefore, investigating these issues is important. Income sources and asset composition vary greatly among income groups, and the effects of easy monetary policy differ among income sources and assets. These differences can significantly affect income and wealth distribution. According to the literature, easy monetary policy affects income and wealth distribution through various channels. On the one hand, easy monetary policy may worsen income and wealth distribution through two main channels. (1) The income composition channel. Middle-and low-income households mainly rely on labor income, while high-income households rely on capital income. Therefore, inequality in income and wealth distribution widens if the increase in capital income resulting from easy monetary policy is greater than the increase in labor income. (2) The financial segmentation channel. By stimulating financial activities, easy monetary policy would disproportionately benefit wealthy households, as they are generally more engaged in the financial market, and thus widen inequalities in income and wealth distribution. On the other hand, easy monetary policy may narrow the income and wealth inequality through three channels. (1) The saving redistribution channel. Decreasing interest rates or increasing inflation benefits debtors while hurting creditors, and creditors are generally wealthier than debtors, so easy monetary policy can decrease income inequality and narrow the wealth gap. (2) The earning heterogeneity channel. Studies show that the groups at the bottom of the income distribution are the most vulnerable to the effects of economic fluctuations. Specifically, during an economic downturn, those low-income groups are generally the first to lose their jobs or experience a decrease in wages, whereas those in high-income groups are less affected by economic fluctuations. Therefore, by stimulating the economy, easy monetary policy helps those low-income groups retain their jobs and increase their wages, thereby narrowing the income and wealth gaps. (3) The real estate channel. Studies find that in the United States, the inequality in wealth distribution is much milder than that in income distribution, mainly because of the appreciation of real estate held by the middle class, which prevents the continuous concentration of wealth among those in the wealthiest group. As easy monetary policy may affect income and wealth distribution through various channels and its net effect is ambiguous, the issue calls for empirical exploration. Empirical studies of the relationship between monetary policy and income/wealth distribution in China are under supply because of data unavailability, especially a lack of micro-level, long-term household data. This paper contributes to the literature in the following ways: (1) It is the first study in China to use micro-level household data (China Household Tracking Survey, CFPS) to explore the impact of monetary policy on income and wealth distribution. (2) It also separately investigates the effects of monetary policy on various components of income and wealth, including labor income, financial asset income, net debt, and real estate values. (3) Different from the popular practice of focusing on overall indicators such as the Gini or Theil coefficients, we reveal the complete picture of inequality by specifically describing its effects on different income groups. This paper's main findings are as follows: (1) Generally, credit growth reduces household income inequality. (2) Credit growth can significantly increase labor income and the wages of low-and middle-income groups, effectively reducing labor income inequality. (3) The impact of credit growth on financial asset inequality is insignificant because Chinese households have quite low proportions of non-monetary financial assets, even for high-income households. Moreover, most households find it difficult to profit from financial transactions. (4) Credit growth increases house prices for all income groups, but the increase is greater for high-income groups relative to low-income groups. Therefore, increases in house prices widen the wealth gaps between income groups. (5) Regarding the mechanisms through which monetary policy may affect income distribution, the two mechanisms through which easy monetary policy may worsen income distribution (the income composition and financial segmentation channels) are not significant because most families do not profit from financial transactions, even those in high-income groups. Meanwhile, among the three mechanisms through which easy monetary policy may improve income distribution, the saving redistribution and earning heterogeneity effects are supported by the data, whereas real estate has the opposite effect in China. Finally, as the most top-income households are not included in our sample, our conclusions may underestimate the effects of credit growth on income and wealth for those high-income groups.
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