China’s Extreme Inequality: The Structural Legacies of State Socialism

Abstract

With modest income differences and virtually no private wealth four decades ago, China’s inequalities of income and wealth are now almost as extreme as in the United States and Russia. Despite unusually high levels of state control over national assets and strong fiscal capacity, redistribution of income and wealth is barely measurable. This puzzling outcome is a by-product of China’s highly distinctive political and economic structures, which retain many features of the prior state socialist model. These structures are designed to maintain Communist Party control, enforce the priorities of the central Party-state, and push rapid growth through high levels of investment. They include migration controls coupled with state ownership of land, an enduringly large capital-intensive state sector served by a financial system dominated by state banks, a tax base heavily dependent on the scale of production, a fiscal system that favors central priorities and drives subnational governments into land expropriation and property development, and the near absence of taxes on household property and related income.