Market-oriented reforms and wealth inequality in China

Abstract

Over the last few decades, China's growing wealth inequality has mirrored the contemporary global trend. We investigate the effects of China's market-oriented reforms on wealth inequality using a dynamic general equilibrium model with an incomplete market and idiosyncratic risks. Focusing on the relaxation of private entry and the easing of financial constraints as two pivotal reforms, we show that our model-generated results closely match the actual wealth distribution from 1995 to 2018, with the reform of private enterprise entry accounting for most of the widening wealth disparity. We elucidate the underlying mechanisms of these two reforms using counterfactual simulations and discover that through the savings rate mechanism, the two reforms will collectively form an inverted U-shaped Kuznets curve in wealth inequality as reforms deepen in the future. By calculating the transition dynamics from 1995 to 2035, we confirm that the Kuznets turning point in China lies between 2020 and 2025.