Source: The Wall Street Journal                         Date: 17 August, 2010

The good news: Chinese people have more money, on average, than most analysts realize. The bad news: Most of that extra wealth lies with the already-rich, widening income inequality beyond that suggested by official figures. This crowd is often supplementing its earnings with 'gray' income which can include kickbacks, bribes and the like.

These are the conclusions of academic research into China's real income levels by Mr. Wang Xiaolu, of the China Reform Foundation, an economic development research group. Happily, the sponsor of the research, Credit Suisse, provides a silver lining: Its analysts have thoughtfully proposed a number of stocks and sectors that could benefit from the fact that China's filthy rich are both filthier, and richer, than they seem at first sight.

Based on a detailed look at spending and income patterns in China in 2008, Mr. Wang estimates China's average urban household income is 90% higher than official data. His figures suggest the top 10% of Chinese households are 3.2 times richer than public data show, while the second decile's income is 2.1 times higher.

Behind this official underestimate of Chinese household wealth lies what Mr. Wang terms 'gray' income, such as government and party officials receiving outsize cash gifts when their offspring marry, or benefiting from a bit of insider trading in the property market, or receiving under-the-table payments in return for favorable treatment. Such items contributed to total hidden income in 2008 of nearly USD1.4 trillion, equivalent to roughly 30% of China's GDP.

One corollary, that the gap between China's rich and poor is becoming ever wider, is a worrying social problem. Still, not to let corruption and inequality get too much in the way of a good investment story, Credit Suisse's takeaway is that there could be even more latent potential in the Chinese consumer story than investors currently suppose. That's good news for luxury goods providers like LVMH or BMW, for Chinese property developers, and for gambling companies with a big presence in Macau.

Rather than a consumption basket, maybe call this one a corruption basket.