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  • Writer's pictureRealFacts Editorial Team

Uneven Prosperity: The Challenge of Regional Inequality in China


China

Historical Context: The Roots of Inequality That Persist Today


The roots of China's regional inequality date back to the economic reforms initiated by Deng Xiaoping in the late 1970s. Deng's strategy prioritized the development of special economic zones along the coast, allowing these areas to experiment with market activities and attract foreign investment. This policy was remarkably successful, transforming coastal cities into economic powerhouses. However, it also led to significant regional disparities. Deng famously stated, "Let some people and some regions get rich first," with the promise that others would eventually catch up. Decades later, the inland regions still lag significantly behind the east coast.


China's regional disparities threaten national stability and economic growth. It has become one of the most discussed topics especially among their political leaders as they desperately try to fix the issue. The recent travels of top officials highlight their strategic focus: Prime Minister Li Qiang's visit to Xinjiang, Vice Premier Ding Xuexiang's trip to Shenyang, and President Xi Jinping's symposium in Chongqing. These visits underscore a concerted effort to address long standing regional inequalities, particularly between the prosperous eastern coastal regions and the underdeveloped western and northeastern areas.


Today, GDP per capita contrasts between regions. The western and northeastern regions, which encompass most of China's landmass and a third of its population, have GDP per capita figures of 70,870 yuan ($9,800 USD) and 60,400 yuan, respectively. In contrast, the coastal regions boast a GDP per capita of 124,800 yuan. Beijing, the richest provincial-level unit, is four times wealthier than Gansu, the poorest. This disparity not only reflects economic inequality but also threatens social and political stability.


For context, conversion rates from yuan to dollars:


  • 70,870 yuan = $9,922

  • 60,400 yuan = $8,456

  • 124,800 yuan = $17,472


Map of China GDP

Government Interventions: Infrastructure and Subsides


To bridge this gap, China has launched several initiatives. The "Go West" strategy, introduced in 2000, aimed to develop the western provinces through large-scale infrastructure projects. Since its inception, approximately 40,000 kilometers of railways have been laid in western China, surpassing the total length of tracks in Japan. Roads, bridges, and airports have been built, often linked to the ambitious Belt and Road Initiative, which seeks to recreate the ancient Silk Road trade route.


In addition to infrastructure, the government has provided substantial financial support to the inland regions. Unlike coastal provinces, which largely rely on locally raised taxes, the western and northeastern regions receive significant funds from the central government. In 2023 alone, these regions received 5 trillion yuan, constituting over half of the budget in some provinces. Wealthy coastal cities have been paired with poorer inland cities to offer direct assistance, such as food-processing companies in Shanghai buying agricultural goods from Zunyi, a city 1,700 kilometers west.


Mixed Results: Successes and Shortcomings


These policies have yielded mixed results. Initially, they helped reduce regional disparities. Between 2000 and 2015, GDP per capita in the western provinces rose from 35% to 54% of coastal levels, and from 62% to 71% in the northeast. Despite these gains, regional inequality has remained persistent or even worsened over the past decade. Western provinces' residents now earn about 57% of what those on the coast make, while northeastern residents earn only 48%.


Infrastructure investments have not always spurred local economic growth. For example, Tongwei, a county in Gansu province, has had a high-speed railway station since 2017. However, instead of attracting business, the railway primarily facilitates the migration of young people to coastal cities in search of better opportunities. A 2020 study by researchers at Nanjing University of Finance and Economics and the University of Cambridge found that high-speed rail connections benefit large cities by bringing in more workers but have "insignificant" economic effects on small cities.


Ethnic Tensions and Border Security


Regional inequality is further complicated by ethnic tensions. Most of China's ethnic minorities live inland, and the government is concerned about their loyalty and the potential for secessionist movements. Economic development is seen as a way to bind these regions to Beijing. However, the government's cultural and security policies often alienate minority groups. For example, nomads on the Tibetan plateau have been forcibly settled, and Mongols have been displaced to make way for mining operations. The government's encouragement of Han migration to these regions aims to dilute minority populations and enhance security.


To secure its 22,000 kilometers of land borders, China has incentivized settlement in these areas through exemptions from the one-child policy and cash subsidies. Border towns are also developing industrial parks, tourist attractions, and libraries to boost local economies.


Future Directions: Education and Private Investment


To address these issues more effectively, experts suggest focusing on education and attracting private investment. Government spending per high-school student in the west is only 60% of that in the east, and only 16 of China's top 100 universities are in the west. This educational disparity results in lower human capital and less economic dynamism. The eastern provinces have five times as many high-tech firms as the hinterlands.


Encouraging private investment in the west and northeast is challenging due to bureaucratic inefficiencies and corruption. However, creating a more business-friendly environment could help. Additionally, shifting focus from hard infrastructure to softer investments, such as education and healthcare, could foster long-term economic growth and reduce inequality.


Rising Income Inequality: A Global Perspective


China's income inequality is not only regional but also reflects a broader national trend. Using data from the China Household Income Project (CHIP) and the China Family Panel Studies (CFPS), researchers have tracked income growth and inequality from 1988 to 2018. The data reveals that income growth has been significantly skewed towards the top earners. The top 5% saw their incomes grow at an annual rate of 8.9%, while the top 0.1% experienced a staggering 12% annual growth, resulting in a 30-fold increase over three decades.


Per capita income growth in China and other countries

Despite this widening inequality, both the middle class and the poor have also seen substantial income growth. The median income grew at an annual rate of 7%, resulting in an eightfold increase over 30 years, while the bottom 10% experienced a 5% annual growth, or a fourfold increase. Compared to other countries, China's income growth across all income levels has been remarkably high.


Interestingly, China's income growth has been primarily driven by labor income rather than capital income. For the top decile, labor income accounted for about 90% of total income, reflecting significant gains in human capital. The rates of return on capital for the top income groups have consistently been below 1%, underscoring the limited role of capital income.


Tackling Inequality: Redistributions and Achieving Common Prosperity


Government redistribution has had a relatively minor impact on reducing inequality in China. After taxes and government transfers, the top income decile's share is reduced by only 4%, compared to 25% in France and 19% in the U.S. Similarly, redistribution increases the bottom 50% income share by only 6%, compared to 52% in France and 53% in the U.S. These findings highlight the limited effectiveness of China's redistribution policies in addressing inequality.


The rapid increase in income inequality, driven by substantial gains among the top earners, poses a significant challenge for China. While the poor have also experienced real income growth, the disparity remains stark. High income inequality may be more tolerable when the poor also see absolute gains, but as overall economic growth slows, tolerance for inequality may wane. Policymakers need to address these disparities to ensure social stability and sustained economic development.


China's leaders face a formidable challenge in addressing regional and income inequality. Despite significant investments in infrastructure and financial support for inland regions, disparities persist. The dependence on natural resources, ethnic tensions, and the limited impact of redistribution policies compound the problem. To create a more balanced and equitable society, China must focus on education, attract private investment, and foster economic diversification. As economic growth slows, addressing these inequalities will be crucial for maintaining social stability and achieving the vision of "common prosperity" championed by President Xi Jinping.

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