Influential Determinants of Income Disparity in China: An Examination Using Panel Data

Abstract

Over the past few decades, the world has witnessed the economic miracle that China has achieved, but it is also worried about its rapidly increasing level of income inequality. This paper uses a panel data regression model to assess to what extent urbanization, Foreign Direct Investment (FDI), inflation, and education affect income inequality in China, using data from 25 Chinese provinces from 1995-2010. This study demonstrates that in China, the link between income inequality and urbanization aligns with the Kuznets inverted-U curve hypothesis. Meanwhile, FDI and education correlate positively with income inequality, while inflation and income inequality correlate negatively. The finding of this study argues that the policymaker in China should moderate urbanization to a certain extent, direct FDI flows to sectors that better benefit society as a whole, limit the rich's access to additional educational resources through their wealth, and use moderate expansionary monetary policy, thereby reducing income inequality while ensuring sustained economic growth.