Income Inequality in China and its Societal Stability

Key Insight

China exhibits very high and rapidly rising income inequality during its reform era. The official Gini index peaked at 0.49 in 2008-2009, falling marginally to 0.47 by 2014, substantially higher than developed countries and successful East Asian economies like Japan, South Korea, and Taiwan, or even India. Wealth inequality is more extreme, with the top 10 percent of households owning about 85 percent of assets, compared to 57 percent of income. This inequality stems partly from the natural economic development process, shifting from agriculture to industry, where early beneficiaries in the modern sector accrue wealth faster. However, specific Chinese factors, such as vastly different property rights regimes for urban (benefiting from housing privatization without capital gains taxes) and rural households (facing land confiscation at below-market rates), have exacerbated this issue.

Despite this high and growing inequality, widespread social unrest has not occurred. Public surveys, like the Pew Research Center's, show strong satisfaction among Chinese citizens, with over 80 percent content with national conditions and 89 percent rating the economy 'good' in 2014. This stability is attributed to a combination of factors: an authoritarian political system that suppresses dissent, but more importantly, a substantial rise in average incomes (229 percent growth in per capita income from 1988-2008), which has led many to prioritize their own improving opportunities. The government has also actively addressed specific inequalities beyond individual income, notably urban-rural and regional disparities. Policies included relaxing grain-growing rules, abolishing agricultural taxes, investing in farm-to-market roads and food processing, and launching infrastructure programs for hinterland provinces. These efforts contributed to the urban-rural income gap shrinking since 2009 and provincial wage gaps closing significantly by 2011, with half of provinces having urban wages within 10 percent of the national average.

Recent trends indicate income inequality may have peaked, with incomes for lower-income individuals growing faster than higher-income individuals since 2010, consistent with the Gini index decrease. This shift is largely driven by organic economic changes, such as a shrinking supply of young migrant workers increasing blue-collar wages, and a surge in college graduates intensifying competition for high-end jobs. The government's 12th Five Year Plan (2011-2015) aimed to reduce inequality by promoting labor-intensive service sectors and building a social safety net, including pensions and health insurance for most residents, albeit with low benefits. However, to reach the lower inequality levels of advanced East Asian economies, more aggressive policies are required, specifically taxing capital income and addressing the vast accumulation of assets linked to corruption, as existing measures do not significantly impact asset distribution or capital ownership.