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Reduced Regional Income Inequality in China

Masashi Hoshino
Assistant Professor, Faculty of Political Science and Economics, Waseda University

1. Is the inequality truly reduced?

Shadow banking is the hot topic about the Chinese economy today. What is not well known, however, is that in the shadow of that issue, income inequality in China has been decreasing.

According to the announcement on January 18, 2013, made by Mr. Ma Jiantang—the Commissioner of the National Bureau of Statistics of China—the inequality in disposable income per household member measured by the Gini coefficient has been declining after reaching a peak in 2008.

As for the background of a sudden release of the Gini coefficient at this particular moment after its long absence, the retroactive revision of income statistics which had different definitions for urban and rural areas has been completed, which the Commissioner Ma emphasized at the news conference. As a matter of fact, it was pointed out as an issue to be improved in the China’s Main Statistical Concepts: Standards and Methodology published by the National Bureau of Statistics in 2010. On the other hand, the Gini coefficient, which was “released at the last minute” of the Hu Jintao government, has political implications as well, and therefore, we should interpret its figures with caution.

Accordingly, using the data collected from each of 62 regions—obtained by dividing each of 31 provinces into urban and rural areas in China—this paper has estimated the inequality in real income per household member between regions in China by an inequality measure called the mean logarithmic deviation (weighted by population) (Figure 1).

The inequality—with a rapid decrease in 1995 in-between because of restraining inflation— continuously increased since the 1980s, peaked in 2009, and then kept decreasing. At all events, income inequality between regions has certainly been decreasing.

Figure 1 Decomposition of Inter Regional Real Income per Household Members Inequality into Urban and Rural Areas

Source) Estimates by author based on Department of Urban Society and Economic Statistics, National Bureau of Statistics of China, the China Urban Life and Price Yearbook (each year’s edition), China Statistics Press, etc.
Note) Estimates by the mean logarithmic deviation (weighted by population)

2. Why has the inequality been reduced?

Why has the inequality been reduced? If we decompose the total inequality in Figure 1—into the inequality between urban and rural areas, within rural areas, and within urban areas—the gap between urban and rural areas has been drastically reduced since 2010, just as the total inequality has. In other words, the inequality has decreased because the rise in real income per household member in rural areas has exceeded that in urban areas since 2010.

What, then, has brought about such a change in the rise of income? Household income in China is categorized into incomes from wages and salaries, household operations, properties, and transfers. When we decompose the inequality in real income per household member between regions in China measured by the Gini coefficient—with an inequality measure called the pseudo-Gini coefficient—into the inequality in the above four types of income, the inequality in income from wages and salaries has drastically decreased since 2010 (Figure 2).

Therefore, as the increase in income from wages and salaries of households in rural areas substantially exceeded that of their counterparts in urban areas, the inequality in real income per household member between regions in China has declined.

Incomes from wages and salaries in rural areas are those at government organizations and local enterprises in rural areas such as township and local enterprises as well as those of migrant workers who work fewer than six months per year. In local urban areas with continued investment, demand was created for low-wage rural labor in the construction and service industries, and wages for low-wage workers rose from the latter half of the 2000s. As a result, the incomes from wages and salaries of rural households are thought to have increased more rapidly than those in urban areas.

Figure 2 Decomposition of Inter Regional Real Income per Household Members Inequality into Inequalities in Four Types of income.

Source) Same as Figure 1.
Note) Estimates by the pseudo-Gini coefficient. The larger the figure is above 0, the more it contributes to an increase in the total inequality; the smaller below 0, the more it contributes to a decrease in the total inequality; and the closer to 0, the less it contributes to either of these.

3. Is it sustainable to reduce the inequality?

Recently, funds collected by shadow banking such as wealth management products (licai) have flowed into local investment projects through financing platforms established by local governments. For the purpose of giving favorable impacts on the promotion of the high-ranking local organizations of the Communist Party of China and local government officials, local governments have the tendency to rely on extensive growth heavily skewed toward investment to increase gross regional product and its growth rate. Growth in local areas will come to an end sooner or later, however, as real estate prices inevitably hit a ceiling at some point.

As such, with a limit on the employment of rural workers in local urban areas, the migration of people between regions should be liberalized in order to facilitate migration to big urban areas. However, the Household Register System (Hukou system) prevents rural workers from staying in urban areas by creating discrimination in employment, housing, education, and the like. The Household Register System was originally a peculiar system introduced at the time of the planned economy under which the government allocated the labor force according to the plan. Now that China is a de facto market economy, it does not need an economic system that is at odds with reality.

The Household Register System is also related to the inequality in income from transfers in Figure 2, as the income in rural areas includes benefits received from the government, such as social security payment and subsidies. For example, the New Rural Pension Insurance System (Xinxing Nongcun Yanglao Baoxian Zhidu) saw its finance stabilized with local government expenditures added to individual accounts, and therefore, the rural participation rate in the pension scheme, which was less than 20 percent in the 2000s, rose to about 60 percent in 2011. Going forward, if the recipients of pension increase in rural areas, and further, if the social security system in rural areas becomes similar to the system in urban areas, the inequality in income from transfers is expected to decrease.

Accordingly, as reform of the Household Register System brings an increase of incomes from wages and salaries as well as income from transfers in rural areas, it will contribute to a decrease in the inequality in real income per household member between regions. Abolition of the Household Register System is necessary for a sustainable reduction of this inequality.

Reference

Masashi Hoshino (2012) “Changes in the Definitions of Urban areas and Trends in Income Inequality between Urban and Rural Areas [Toshi teigi no Hensen to Toshi Noson kan Shotoku kakusa no Doko],” The Urbanization and Industrial Clusters of the Yangtze River Delta in China [Chugoku Choko Deruta no Toshika to Sangyo shuseki], Keiso shobo, pp. 303 – 326.

Masashi Hoshino
Assistant Professor, Faculty of Political Science and Economics, Waseda University

[Profile]
Masashi HOSHINO has a Ph.D. in Economics from Kobe University in 2009. He was a Post Doctoral Fellow at Hokkaido University from 2009 to 2013, a Visiting Scholar at University of Tokyo from 2010 to 2011, and a Senior Scholar at Peking University from 2006 to 2008.