China’s hidden household income—otherwise known as its “gray economy”—has topped 6.2 trillion yuan (U.S.$1 trillion) or about 12 percent of the world’s most populous nation’s economic output, a new report says, indicating a widening wealth gap fueled by corruption.

The state-backed China Reform Foundation report, which provided the 2011 figures, said most undeclared income in the Chinese economy is undocumented and is held in the hands of relatively few people, according to Caixin magazine this week.

The research, which has the political backing of China’s top-level State Development and Reform Commission, was based on a survey of more than 5,300 households in 18 provinces and 66 cities, it said.

The richest 10 percent of urban Chinese made an average income of 188,000 yuan [about U.S. $31,000] in 2012, more than three times the officially reported income level.

According to the study, rich city-dwellers have an income around 21 times that of the poorest Chinese, compared with the officially reported factor of 8.6.

The report’s authors concluded that the difference must be explained by hidden income, or the “gray economy,” which can range from bribery and unrecorded transactions to “gifts” given to officials and teachers on important occasions.

“Corruption’s impact on society is expanding, posing a serious challenge to society,” Caixin quoted the report as saying.

According to study lead author Wang Xiaolu, the foundation had set out to reveal details of income that is typically not mentioned in official surveys.

Instead, Wang’s team used an algorithm to calculate hidden income based on perceived gaps between reported income and consumption.

Inequality

The report concluded that China’s Gini coefficient, a measure of inequality, was at 0.5 in urban areas, well above the internationally recognized danger level of 0.4 that triggers social unrest.

Widespread mismanagement of public funds, a loose monetary policy and lax enforcement of regulations were to blame for the growth of China’s hidden economy, the report said.

It also cited state-sponsored monopolies, rampant public sector corruption, and a lack of effective public oversight as contributing to the problem.

No checks on the elite

Nanjing-based freelance writer Sun Lin said the report confirmed what many in China already suspect.

“Looking at China’s situation overall, we can say that the profits tend to be concentrated in the hands of a minority of interest groups,” Sun said.

“The majority of ordinary people haven’t really seen any of these benefits.”

According to Guangdong-based blogger Li Jun, the key to the problem lies in a lack of checks and balances on the power of the ruling Chinese Communist Party elite.

“The government exercises too much power, which is the crux of the matter,” Li said. “The only way to solve the problems of corruption and hidden income is to set up a government whose power is limited.”

Protective measures

But he said enforcing oversight was made harder by the fact that officials had become adept at protecting themselves in recent years.

“Officials never put their assets in their own names,” Li said. “They hide it…which they can do because the issue of the source of the problem hasn’t been addressed.”

President Xi Jinping has launched a nationwide clampdown on corruption, warning that the ruling Chinese Communist Party must beat graft or lose power.

However, police continue to detain activists who call for greater transparency.

The overseas-based China Human Rights Defenders (CHRD) said on Thursday it has confirmed the criminal detentions or disappearances of 58 individuals in the ongoing crackdown on anti-corruption activists, half of whom have been formally arrested.

Reported by Wen Jian for RFA’s Mandarin Service. Translated and written in English by Luisetta Mudie.