By Shi Shujie

Research Report Vol.19 No.5, 2017

According to China’s National Bureau of Statistics (NBS), the nation’s 2016 Gini coefficient was 0.465, showing a year-on-year growth of 0.003, the first instance of growth after seven consecutive years of decline. There is great variance in ideas on how income inequality can be reduced, with two focal points to the debate: First, has China already broken past the Kuznets curve turning point? That is to say, will income inequality automatically decline with the economic growth? Second, is the inequality a result of market-oriented reform or an insufficiency thereof? That is, should the current market-oriented reform to reduce income inequality continue? To answer these questions and to come up with the response measures, an in-depth analysis of the conditions and constraints faced by the current effort to reduce income inequality in China must be carried out based on an accurate understanding of the overall state of China’s income inequality.

I. Overall State of Income Inequality in China

1. Income inequality still at a high level

Since China’s Reform and Opening-Up, while the economy has continually grown at a rapid rate, income inequality has increased just as speedily (see Figures 1 and 2). In general, the evolution of income inequality may be divided into three stages:

Stage 1: 1978-1985. Income inequality was relatively stable and low at this time. The Gini coefficient in urban areas rose a mere 0.03 from 0.16 to 0.19, and the coefficient for rural areas rose only 0.02 from 0.21 to 0.23. The percentage of all pretax income earned by the wealthiest 10% only grew by 2.4 percentage points from 27.1% to 29.5%.

Stage 2: 1985-2008. Income equality increased rapidly, exceeding the warning level of 0.4. The Gini coefficient for the nation was 0.412 in 2000, and it reached 0.491 in 2008. The coefficients for urban and rural areas both saw significant growth, though they still remained below 0.4. This means that the difference in income between the urban and rural populations was a major contributor to national income inequality. The percentage of all pretax income earned by the wealthiest 10% rose from 29.5% to 42.4%, whereas the percentage of all pretax income earned by the poorest 50% decreased from 25.4% to 14.8%, accounting for a significant augmentation in income inequality between classes.

Stage 3: 2008-present. Income inequality has slowly been declining, but it is still at a high level. From 2008 to 2015, the national Gini coefficient decreased each year, though only by 0.029. The percentage of all pretax income earned by the wealthiest 10% only declined by 1 percentage point, while the percentage of all pretax income earned by the poorest 50% remained the same. In 2016, the national Gini coefficient made an upturn of 0.003. As can be seen, despite the decline in income inequality over the past several years, the margin of decline has been quite small and tending toward stagnancy.

In looking at trends since the Reform and Opening-Up, China’s current income inequality is still quite high, and it cannot be assumed that the Kuznets curve turning point has already been broken past.

2. Uncertainty in income inequality development trends

Urban-rural inequality, regional inequality, and property income inequality are the three major dimensions that influence the overall state of China’s income inequality. Since the Reform and Opening-Up, these three dimensions have seen profound changes in their tendencies and relative importance.

First, urban-rural income inequality has evolved as a backward N curve, though the recent stint of decline has slowed. The urban-rural division under China’s planned economy led to a high degree of urban-rural income inequality. During the early years of the Reform and Opening-Up, reforms to the system achieved huge breakthroughs, significantly diminishing the urban-rural income gap. In 1985, the urban-rural income ratio was 1.86, 28% lower than in 1978. But as rural reform benefits began to wear off and reforms in the urban system were propelled, the urban-rural income gap grew rapidly (though it declined for a short time in the early 1990s due to the government boosting the price of agricultural products); the ratio reached 3.33 by 2009, after which it regressed and declined to 3.0 in 2014 (see Figure 3). However, the current income gap is still at a high level, and its margin of decline is diminishing with time (see Figure 4). With the decreasing level of inequality and the increasing income percentage for urban areas, the contribution of urban-rural income inequality to overall income inequality is declining.

Second, regional income inequality has also evolved as a backward curve, though it is currently facing the potential to rise again. Based on the per capita GDPcoefficient of variation, three instances of trend turnaround have occurred for regional income inequality since the Reform and Opening-Up, such turnarounds resulting mainly from inter- and intraregional relative variation in the eastern, central, western, and northeastern regions (see Figures 5 and 6). For 1978-1990, with the push of market-oriented reform, intraregional inequality rapidly declined in the east, while interregional inequality saw no overall change, and there was a reduction in regional income inequality. For 1990-2002, intraregional inequality saw no overall change, though inequality continually grew between the east and other regions, and there was an increase in regional income inequality. For 2002-2014, with significant development in the west, the revival of old industrial bases in the northeast, and more momentum given to the central region, inequality between the east and other regions declined; regional income inequality declined to a greater extent, and the contribution of income inequality in the eastern region to overall income inequality declined. Nonetheless, in recent years, the speed of economic growth for the central, western, and northeastern regions has slowed, causing regional income inequality to rise again in 2015, and there is potential for it to continue to rise in the future.

Third, wealth inequality is rapidly increasing, and the contribution of property income inequality to overall income inequality is also rising. Since the Reform and Opening-Up, with the increasing accumulation of private property, the amount of wealth possessed by certain social groups is rapidly diminishing. According to the World Wealth and Income Database, the top 10% of China’s wealthiest people owned 41% of assets in the nation in 1995, and by 2010, the figure had exceeded 60%. After that, the growth slowed, but it was still over 67% in 2015. At the same time, the percentage of assets owned by both the 40% of people in the middle and the 50% of people at the bottom significantly declined, falling respectively from 43% and 16% in 1995 to 30% and 7% in 2010. Despite the rate of decline slowing after 2010, the respective percentages still reached as low as 26% and 6% in 2015 (see Figure 7). Wealth inequality evolves into property income inequality, and the two feed off of each other. Property income inequality is already demonstrating a trend of greater and greater imbalance between urban and rural areas, different regions, and different income groups, and it is a major factor in the growth of income inequality (Wang Xiong Jun, 2017).

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