China's New Urban-Rural Divide and Pitfalls for the Chinese Economy

Abstract

ABSTRACT This paper examines the widening urban-rural income gap in China which has existed since 1985, and its implications for the Chinese economy. I argue that the declining fiscal capacity of the central government and the ensuing central-local competition for revenues, a systematic urban bias in Chinese financial mechanisms, and the structural vulnerability of small peasant farmers in a transitional economy have all contributed to the growing disparity between urban and rural residents. The consequences of this growing urban-rural gap have begun to haunt the Chinese economy as it struggles to readjust from export-oriented growth to the boost of domestic demand.