Income Inequality in China: Communism Meets the Free Market



China’s economy has undergone unprecedented growth in the past two decades. While many in China and elsewhere revere this growth as a path to reducing poverty in the country, this is not necessarily the case. When an economy develops with such rapid growth, it does not necessarily grow equally in all economic sectors. The result? Income inequality. Income inequality is an issue that plagues most developing countries and is especially pronounced in China. In the case of China, there are two main factors that contribute to its growing income inequality: urbanization and coastal growth.


Over the past three decades China has privatized many formally state-run enterprises. This has resulted in the rezoning of rural land for industry, a construction boom, and a rapid growth in personal wealth among Chinese citizens. A 2010 study showed that the per person monthly net income in rural areas was 4,225 yuan, while the per person monthly disposableincome was 16,500 yuan. Despite the continued urbanization, 50.3% of the Chinese population lives in rural areas. Additionally, in three rural Chinese provinces, Tibet, Yunnan, and Sichuan, there are over 50 unbanked counties, meaning that the residents of these counties lack access to basic financial services. This stark divide between urban and rural areas has also created an enormous migrant worker population which China estimates to be around 229.8 million with many of these workers earning less than 1,000 yuan per month.


Even prior to the modern era, the location of the Chinese economic center has gradually shifted east, toward the coast. This is because of the shift toward the importance of maritime trade and the gradual movement away from agriculture being the center of the economy. Following the cooling of Soviet and Chinese relations in the 1960s, Mao Zedong’s government sought to protect Chinese industrialization which bolstered industrial growth which was largely concentrated on the coastal areas. After the 1978 reform period which allowed many private enterprises to operate, government established many costal open economic zones deepening this gap. Currently, the Chinese government is attempting to remedy the economic gap between the coastal and inland regions with its “Western Development Campaign”which seeks to create inland “Economic and Technological Development Zones” among other measures.


Ironically, the Chinese government has only recently begun address the current economic inequalitybecause prior to the privatization of many sectors of the economy it was impossible for individuals to accrue much personal wealth. Unlike Western laisse fair economies, the centrally-planned Chinese economy kept income levels low, but equal. The government plans to address the rising income inequality through measures such as tax reform and a household allowance for child and adult education. While to many the issue of income inequality is a “necessary evil” that is the price people pay for living in a free-market society, it is important to remember that income inequality has been the main contributing factor to nearly every revolution in the past century that has supplanted a free-market economy with a centrally-planned economy.


-Clayton Christian,

JD/MBA Candidate at Tulane University