ONE look around China's streets shows that consumer trends - such as soaring housing prices, skyrocketing new car sales and strong domestic demand for luxury goods - are confirmation that incomes are much higher than what the government's statisticians say they are.

As for Wang Xiaolu, deputy director and senior research fellow of the National Economic Research Institute of the China Reform Foundation, his statistics - based on a different methodology than what the National Bureau of Statistics of China (NBSC) uses - indicate that not only are average incomes increasing rapidly, but also the income gap between the rich and poor in China has been underestimated.

According to his work, the government's statistics omit roughly 9.26 trillion yuan (US$1.36 trillion) in "invisible" income - that is, money earned illegally or not declared to tax authorities.

Why do official statistics underplay the disparity? And what needs to happen to address the growing gap? There are no easy answers, says Wang in the following interview with China Knowledge@Wharton.

Q: Your research shows that there is a discrepancy between official data on per-capita income and what we see on the streets. Why is that?

A: The NBSC draws random samples from urban and rural households when compiling statistics. The method is not the problem, but it's the sample groups that cause certain deviations.

First, participation in the sample group is voluntary, and a considerable number of people with high incomes choose not to participate. Excluding these high earners seriously skews the results. Second, many participants do not tell the truth about their real incomes. They may be honest about their wages, but off-payroll income is another issue entirely. This unofficial "gray income" is not included in the survey data.

Q: Your research is also based on household surveys. How do you ensure that your data is reliable?

A: Our survey draws samples from 64 cities and 14 counties of varying sizes across 19 provinces. We surveyed 4,909 families, and after a strict screening process, compiled statistics using 4,195 of the samples.

We employed professional surveyors to gather the primary data from people they were familiar with, such as friends, family, colleagues and neighbors, based on different groups of income and careers, rather than choosing them randomly.

The personal connection in the survey process creates an atmosphere of mutual trust, and this fosters more honest answers.

Q: Since your 4,195 samples were not randomly selected, how can they form an accurate snapshot of the nation?

A: Our purpose in conducting the survey was to calculate the statistical relationship between the disposable income levels and several consumption parameters and test the results against official figures, rather than directly infer the aggregate income distribution from the samples.

For example, the Engel coefficient is a parameter related to income levels (measuring the income elasticity of demand for food). It decreases as incomes increase, which is widely acknowledged in academic circles.

In 2008, the NBSC divided urban sample households into seven groups according to income levels. The lowest income group had an Engel coefficient of 0.4814, with a per capita income of 4,754 yuan.

Beginning with our own lowest income sample group, which we believe to be the most credible, we added in samples until the group's average Engel coefficient was as close as possible to 0.4814. We found that the average income of this group was 5,685 yuan. The difference between the two results is 931 yuan.

Of course, the Engel coefficient is influenced by a number of factors, such as food prices and eating habits, so we applied an econometrics model to eliminate the effects of these factors. We arrived at an average income of 5,350 yuan with an Engel coefficient of 0.481.

According to my research, the total amount of disposable income in China in 2008 was roughly 23.2 trillion yuan, while the NBSC's figure was about 14 trillion yuan.

This suggests that there was about 9.26 trillion yuan in invisible income that year.

Q: Do any organizations question your results?

A: NBSC officials pay close attention to the results. We have discussed the matter. They generally think the official figures might have deviations, but not as much as what I get.

Hidden power

Q: Were you surprised by the results?

A: No. Our results may sound frightening, but there are many social phenomena that can't be explained by NBSC statistics.

For example, according to international standards, the average cost of buying a house should be between three and five times the average annual household income. If the number exceeds five, it is an indication of an unsustainable real estate market.

According to the NBSC, in 2008, the average house cost 10 times the average annual salary. But the real estate market remained hot throughout 2009, with revenue from house sales reaching 3.8 trillion yuan that year. How is it that so many people can afford to buy houses under these circumstances? One possible explanation is that their incomes have been underestimated.

Q: According to your research, invisible money exists across all income groups. Does this mean that both urban and rural residents have more money than widely believed?

A: That's one side of the coin. The other would be that the income gap between the rich and the poor is much wider than we previously thought. In fact, we found that most of the overall gray income was going into the pockets of the wealthiest.

Among the income groups, we discovered that the lowest 10 percent of urban earners made 5,350 yuan, 1.1 times higher than the official 4,754 yuan, but those in the top 10 percent income bracket made 139,000 yuan annually, 3.2 times the official level. So the income disparity in urban areas is 26 times greater, rather than nine times as estimated by the NBSC.

Furthermore, if you compare the highest urban income with the lowest average in rural areas, the gap will be 65 times, while the official estimate is 23 times.

Q: If the income gap continues to widen, what will happen?

A: A large amount of invisible and gray income distorts income distribution and widens the income gap. More important, it completely distorts the positive incentives of a market economy.

(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)