Two Sides of the Same Coin? Rebalancing and Inclusive Growth in China

This paper uses the Shapley Value decomposition technique to assess the factors behind the rise ofinequality in China. It finds that, in many ways, inequality may have been an inevitable by-product ofChina's investment and export-led growth model. Between Chinese households, we find that the mostimportant factors explaining income inequality are location, education, access to health insurance, and labormarket variables, including the sector of employment and enterprise size. Across China's provinces,divergences in per capita incomes are driven by the relative level of capital-intensity, public spending,financial access, privatization, and urbanization. In addition, excess liquidity may have exacerbatedinequality in the last decade, by driving up property prices and the wealth gap. Based on these results,policies that could help broaden the benefits of growth in China include maintaining prudent monetary andcredit policies, a more progressive fiscal tax and expenditure system, higher public spending on health andeducation, deregulation and reforms to increase competition, measures to raise labor incomes and assistvulnerable workers, and better access to finance for both households and SMEs, including in rural areas. Notsurprisingly, given the argued nexus between China's growth strategy and inequality, many of these reformsare the same ones that would help rebalance its economy toward consumption and household incomes.