From Pyramids to Olives

Since embarking on a path of economic reforms in the late 1970s, China has achieved two milestones in improving people’s livelihoods. First, China’s per capita income has risen rapidly, from US$156 to US$12,556 between 1978 and 2021, making it one of the fastest growing economies in the world. Second, China’s poverty rate has declined dramatically. In the past 40 years, China has lifted 770mn rural people out of poverty, accounting for more than 70% of global poverty reduction in the same period. Despite China’s socio-economic achievements in development, we believe a sustained effort is still required to raise income levels and address economic inequality, in order to achieve inclusive growth. Currently, China still has a large low-income population, and the income distribution pattern represents a pyramid rather than an olive shape. China’s Gini coefficients in income, consumption, and wealth distribution are at a high level, and inequality is a prominent issue. China’s economy is still subject to urban–rural disparities; in fact, we can attribute nearly half of the income gap attributed to the urban–rural gap. In addition, wealth in China has continued to concentrate over the past 30 years. With housing assets becoming the main component of household wealth, rising urban housing prices are a major driver of wealth concentration in China. Based on the World Income Inequality Database (WIID), we find that based on certain income classification criteria, the shape of China’s income distribution represents a pyramid shape. This contrasts with that of Nordic countries, Japan, and the US, which are closer to an olive shape. The main reason for this difference is that China still has a large number of low-income people, and its middle-income population is not large enough to support the “waist” of the olive shape. In addition, the income level of China’s middle-income population is relatively low, and their weak risk resilience makes this income group vulnerable to a return to poverty. The focus of improving income distribution is not to create an olive-shaped pattern, but to raise the per capita income level and expand the population size of the middle-income group. We believe that China should continue to raise per capita income and deepen reforms and “opening up” policies, while at the same time implementing redistribution policies to reduce inequality.