Gini Math

If you have stock in Chinese companies, you may want to Divest, Divest, Divest Now!!

And what's wrong? Well it's all the fault of the Gini coefficiant.

The United Nations Development Program recently released statistics that show the Gini coefficient (after Italian statistician Corrado Gini) has reached 0.45 in China. Horrors! This measure of inequality (zero expresses complete equality – good - while one expresses complete inequality - bad) has been going up for 20 years. Now the poorest 20 percent of China's 1.3 billion people account for only 4.7 percent of total income, while the richest 20 percent account for more than half.... just like Beverly Hills.

The Gini coefficient is calculated as a ratio of the areas on the Lorenz curve diagram above. If the area between the straight line of perfect equality and the Lorenz curve is A, and the area underneath the bad Lorenz curve is B, then the Gini coefficient is A/(A+B).

Like China, the US Gina coefficient is also 0.45. Below the US (better?) is Croatia 0.29, Bangladesh 0.32, the European Union 0.32, Egypt 0.34, Indonesia 0.34 and East Timor 0.38. Swell. Above the US is eg Mexico at 0.55. I sure would not want to be lower than the US, and above also seems to be a poor place. Perhaps we've got it just right. Of coures, the actual fact is that this is just another myth of economics. But back to China.

The ruling Communist Party vowed to spread the benefits of economic growth more fairly among all levels of Chinese society, seeking particularly to close the yawning income gap between farmers and city dwellers. President Hu Jintao strongly emphasized the need for more-equitable wealth distribution since taking over three years ago. Still, the gap between rich and poor has continued to widen as market reforms create money-making opportunities for private businesses and allied government officials (the actual problem), while often leaving peasants in the lurch.

An article in the newspaper run by the Party School of the Communist Party of China noted that the income gap has exceeded reasonable limits. "It's worth noting that according to experience in many countries and regions, social contradictions will increase as per capita GDP grows from the 1,000 US dollar level to the 3,000 US dollar level. China is precisely in this period," says the article. "Decision makers should not turn a blind eye to the big income gap."

And the Communist solution: The government has begun to take actions to adjust the income gap by amending the individual income tax law. Raise taxes, that’s the ticket!!! And watch your economy go down the tubes.

Keep an eye on your Chinese stocks.