Income Inequality in Today´s China: How High and Why so High?

In this paper, we first document a rapid increase in income inequality in China’s recent past, capitalizing on newly available survey data collected by several Chinese university survey organizations. By now, China’s income inequality not only greatly surpasses that of the US but also ranks among the highest in the world, especially in comparison to countries with comparable or higher standards of living. We argue that China’s current high income inequality is mainly driven by structural factors that have been sustained by Chinese political system, the main structural determinants being the rural-urban divide and the regional variation in economic well-being. Analyzing 2005 and 2010 comparable survey data in China and US, we examine these structural determinants that may help explain China’s high income inequality.  Our results show that for both periods, once we factor in China’s large structural inequality due to the rural-urban divide and the regional variation in economic wellbeing, China’s remaining inequality closely resembles that of the U.S.