How can we build a harmonious society? Some say it's all about fair play and justice; other favor following the Confucian code, and say all will be well if children respect their parents. But just theorizing won't solve China's problems. What the country urgently needs is to cut the gap between the rich and the poor.

The government has recognized this and is set to publish a new package of regulations on income distribution. But the problems are too deep-seated to be solved by legislation alone.

State-firm fat cats

One of the issues that cause most anger is the runaway pay of CEOs in state firms. In most cases their only qualification for the top job is the fact that they are the children of top ranking officials. As well as salaries 20 times higher than production workers they have lavish expense accounts and goodness knows how much money they are able to salt away on the sly.

Income gaps do not cause problems in privately-owned enterprises, where workers see no reason to compare their incomes to those of their bosses, and are not jealous of their bosses' life styles. The real problem is the system of ownership, and that will not be solved unless these state monopolies are subjected to fair competition.

Income in state companies is 3-4 times higher than in the private sector. A nurse in a state-owned hospital or even an electricity meter reader from the State Grid can earn over 10,000 yuan per month, if you include bonuses and subsidies. When state companies make profits they pay out generous bonuses, but when they make losses, the taxpayer covers their losses. Whatever happens, all the staff in state owned companies, senior or junior alike, have incomes that are 100 percent guaranteed. By contrast 70 percent of private companies operate at a loss and struggle to survive from day to day. But they have to pay the same taxes as state companies – including labor insurance contributions that account for 33 percent of their total salary bill. No wonder many private enterprises fail after just a few years! Statistics show the proportion of officials in the general population was 1:600 in the early 1950s but by 2007 it had risen to 1:26. For every million dollars of GDP, China has 38 officials, but Japan has just 1.4. Streamlining government has been on the agenda for 20 years, but instead every year the bureaucracy gets more and more swollen, inhabiting ever higher office buildings and sending government expenditure out of control.

Bloated bureaucracy

For years, the public have been demanding civil servants declare their incomes and property holdings. The government has made noises about this, but nothing has been put into practice. Shocking corruption cases speak volumes about the need to build an honest and clean government. GDP growth vastly outstrips growth in personal incomes. In a normal economy they would rise in step but in modern China, this is impossible because our development is inherently unbalanced.

Unbalanced development

30 percent of GDP is contributed by real estate and related sectors. Profits in the sector are controlled by a small number of people, so the more rapidly GDP grows, the wider will be the gap between rich and poor.

Another 30 percent of GDP comes from export-oriented enterprises, of which 60 percent are small, labor intensive manufacturers. Most of them have no core technology, no brand, no guaranteed orders, and insufficient working capital. For them, rapid growth of GDP means a widening gap between them and state firms.

Cut back the state, free private enterprise

To solve all these problems and close the unfair income gap, the key is to cut down the size of government, strengthen anti-corruption measures, make official expenditure transparent and narrow the urban-rural gap. The government should invest more in education, health and public housing, so that people do not have to spend 30 percent of their income educating their children, hundreds of yuan on to cure a cold, or the life savings of three generations to buy a flat.

The government should whole-heartedly support the development of private enterprise and in particular make it easy for private firms to get bank loans. 75 percent of the work force and 75 percent of migrant workers work in such enterprises. Only when private enterprise benefits from favorable policies will fairer income distribution lay the foundation of a harmonious society.