Blog Post

Inequality in China

After amply discussing income inequality in Europe and the US, economists are now looking at the magnitude, implications and possible remedies for this phenomenon in the context of the Chinese economy.

By: Date: September 24, 2018 Topic: Global Economics & Governance

Sonali Jain-Chandra published a striking chart on income inequality in China on the IMF blog – which is based on a recently issued working paper. It shows that the Gini coefficient has risen by 15 points since 1990 to 50: that is a big change, even though some increase in inequality could have been expected as the level of development improved.

Differences in education are one important driver of the increase inequality. Rapid technological change and industrialisation have boosted demand, and therefore incomes, for highly skilled workers. Differences in incomes between urban and rural areas are another major factor: educational attainment is lower in rural areas, and China’s hukou system of household registration restricts migration to urban areas, where wages are higher.

While China has implemented policies to limit inequality – such as raising the minimum wage and the minimum threshold for income taxes on multiple occasions, abolishing agricultural taxes, and improving public services and social protection in the countryside – Jain-Chandra thinks that inequality is likely to rise further without additional policy changes, and argues that China could rely more on the personal income tax and less on regressive consumption taxes.

Ben Westmore at the OECD writes that income inequality as measured by the Gini coefficient has been on a declining trend since 2008, having climbed to a very high level – reflecting some regional income convergence as the central, western and north-eastern parts of the country have made progress catching up with the east, and a narrowing of the urban-rural income gap.

Across the income distribution, incomes of those in the middle have risen particularly strongly. Nevertheless, there are signs that many of the poorest are being left behind. The gap between the richest and poorest urban households in terms of disposable income has barely narrowed. In rural areas, it has even widened. The large and persistent income gap is partly the fault of China’s tax and transfer system. In particular, the redistributive influence of the personal income tax regime is stifled by a very generous personal income tax allowance and exemptions that favour high-income individuals. Rules around social security contributions are also regressive.

Speaking of taxes, Gabriel Wildau reports for the Financial Times that China is indeed planning an income-tax cut in order to boost consumption and reduce inequality. The new tax plan raises the threshold above which an individual is subject to income tax from $6,300 to $9,000 per year and expands the three lowest tax brackets – 3%, 10% and 20% – to cover millions of taxpayers who previously paid higher rates. The maximum threshold for the 20% bracket was nearly tripled from $16,000 to $45,000 per year. Almost all individual taxpayers will receive a tax cut, with those earning between $27,000 and $45,000 receiving the largest cut in percentage terms. China is also moving forward with plans to impose a property holding tax, but that process – which is more controversial – is expected to take longer.

Filip Novokmet, Thomas Piketty, Li Yang and Gabriel Zucman compare recent findings on private and public wealth accumulation in China and Russia in their transition from communism to a more capitalist-oriented economic system, and discuss the impact of the different privatisation strategies followed in the two countries on income inequality.

In China, the transition has involved gradual but nevertheless wide-ranging reforms. The reforms were implemented progressively, from special economic zones in coastal cities toward inland provincial regions, and in sectoral waves. By contrast, Russia opted for a “big-bang” transition after the fall of the Soviet Union in 1990-1991, with a rapid transfer of public assets to the private sector and the hasty introduction of free-market economic principles.

Income inequality has increased markedly in both China and Russia since the beginning of their respective transitions but the rise of inequality was much more pronounced and immediate inRussia,and was more limited and gradual in China. Markedly divergent post-communist inequality patterns suggest that the rise in inequality is not inevitable and point to the importance of policies, institutions, and ideology in shaping inequality (see figure below).

Brian Reynold and Yi Wen look at housing costs and regional income inequality in China and the US. Living standards within a country can vary greatly due to differences in regional housing costs: adjusting income by regional housing prices provides a better picture of income inequality. They create a measure of living standard, adjusting disposable income by housing prices for both China and the US. Regional inequality is substantially less severe in the US than in China when considering only disposable income, but when accounting for housing prices, the degree of inequality among China’s provinces improves. For US states, this measure of inequality worsens (see Table below).

Xiaohui Hou, Shuo Li and Qing Wang investigate the relationship between financial structure and income inequality in China and explore a channel for changes of financial structure in order to influence income inequality. Their results suggest that, relative to total bank credit, an increase in the raised capital from the stock market reduces income inequality, whereas a rise of turnover in the stock market augments income inequality. Financial structure affects income inequality by influencing the development of medium-sized enterprises. Their evidence supports the financial structure relevancy view and the three argue that to reduce income inequality, the Chinese government should help promote equity financing and decrease excessive speculation on the stock market.

ChinaPower at CSIS looks into whether women in China face greater inequality than women elsewhere – a question that is made especially interesting in light of the lingering effects of China’s One-Child Policy and the longstanding cultural “son bias”.

Rapid modernisation has enabled China to provide its citizens with improved living standards and increased economic opportunities. Yet this process has yielded uneven gains between men and women. Pronounced wage gaps and imbalanced political representation are just two of the many issues hindering gender equality in China. China’s economic growth has improved overall prosperity, but Chinese women have benefited less from these gains. Throughout the 1980s, female participation in the labour force was high, averaging around 80%. By 2017, however, female workforce participation had dropped to 68.8%. This decreasing trend runs contrary to other major developing countries, like Brazil and South Africa, which witnessed increased female participation over the same period.

In 1973 Albert O. Hirschman published ‘The Changing Tolerance for Income Inequality in the Course of Economic Development’. Init he argues that in the early stage of development, when income inequality among different classes, sectors, and regions tends to rise, society’s tolerance for this inequality will be substantial. The reason people can tolerate this inequality is that they hope and expect that this disparity will fall at one day or another. However, if this disparity does not narrow, there comes a point when people will no longer endure it. Hirschman uses the example of a two-lane tunnel to explain how people respond (the so-called “Tunnel Effect”). Wannaphong Durongkveroj revisits Hirschman’s tunnel effect in the context of China.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic

Working Paper

EU trade policy amid the China-US clash: caught in the crossfire?

What risks face the EU with regard to China’s strategic aims in trade policy and how can the EU respond? The US effort to isolate China poses particular risks for Europe. How can the EU counter such efforts with the aim of forging its own distinct trade policy? How should the EU move forward with reform of the World Trade Organization (WTO) in light of differing demands and aims of trading blocs like China and the US?

By: Anabel González and Nicolas Véron Topic: Global Economics & Governance Date: September 17, 2019
Read article More on this topic

Opinion

China's dual banking system: consolidation as the final solution for weak small banks

There are fundamental solvency and liquidity issues for some small Chinese banks, widely influencing both the bond market as well as the broader financial sector. Given the difficulties in creating a level playing field between small and large banks, there is an expectation that small banks will continue to under-perform.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation Date: September 16, 2019
Read article More on this topic More by this author

Opinion

Germany’s Divided Soul

Eastern Germans vote, think, and feel differently than western Germans do, as the results of the September 1 regional elections make clear. To help tackle the underlying economic causes of this divide, the federal government should introduce incentives to encourage foreign investment in the east of the country.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: September 13, 2019
Read about event

Past Event

Past Event

China-EU investment relations: Exploring competition and industrial policies

This is a closed-door workshop jointly organised by MERICS and Bruegel looking at China-EU investment relations.

Speakers: Miguel Ceballos Barón, Alicia García-Herrero, Mikko Huotari, Yi Huang and Xu Sitao Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 9, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Enhancing Europe's economic sovereignty

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Jean Pisani-Ferry on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Europe's trade policy

Backstage at the Bruegel Annual Meetings, Giuseppe Porcaro talks with André Sapir on European trade policy.

By: The Sound of Economics Topic: Global Economics & Governance Date: September 4, 2019
Read article More on this topic More by this author

Opinion

Last Tango In Biarritz: The End Of The G7?

The seemingly omnipotent G7, the meeting of the seven largest developed economies in the world, is weakening continuously and, as the author suggests, this should worry us all.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 28, 2019
Read article More on this topic More by this author

Opinion

Is this really a currency war or just a tantrum?

Since the People’s Bank of China (PBOC) allowed the yuan to surpass the dreaded level of 7 to the dollar on August 11, rivers of ink have flowed citing a new matter of contention between the U.S. and China, namely using currencies to gain competitiveness or, more simply, a "currency war."

By: Alicia García-Herrero Topic: Global Economics & Governance Date: August 28, 2019
Read article More on this topic

Blog Post

Hong Kong’s economy is still important to the Mainland, at least financially

Hong Kong’s current situation is important for the world in as far as its role as major offshore financial centre is key for China’s inbound and outbound investment and financing. Capital outflows from Hong Kong are especially risky given Hong Kong's so far useful but rigid monetary regime, namely a peg to the USD under a currency board

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: August 19, 2019
Read article More on this topic

Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: July 22, 2019
Read about event More on this topic

Past Event

Past Event

The 4th industrial revolution: opportunities and challenges for Europe and China

What is the current status of EU-China relations concerning innovation, and what might their future look like?

Speakers: Elżbieta Bieńkowska, Chen Dongxiao, Patrick Child, Eric Cornuel, Maria Demertzis, Ding Yuan, Luigi Gambardella, Jiang Jianqing, Frank Kirchner, Pascal Lamy, Li Mingjun, Gwenn Sonck, Gerard Van Schaik, Reinhilde Veugelers, Wang Hongjian, Guntram B. Wolff, Xu Bin, Zhang Hongjun and Zhou Snow Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2019
Read article More on this topic

Opinion

What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: July 10, 2019
Load more posts