# Introduction

China’s impressive economic performance over the last four decades has resulted in unparalleled improvements in living standards and poverty reduction. The rapid transformation of the economy—from agriculture to laborintensive manufacturing and services, as people moved from rural to urban areas and found better jobs—sustained strong growth over 40 years, raised average incomes, and lifted close to 800 million Chinese out of poverty (World Bank and Development Research Center of the State Council, 2022). On average, increased labor income accounted for around two-thirds of the poverty reduction between 1988 and 2007, with contributions shifting from increased agricultural productivity in the first decades, to increased opportunities and earnings in industry and services in the 2000s. This transformation was supported by a multi-pronged strategy that included investments not only in physical capital, but also in human capital by improving and expanding education and health services. From 2013 to 2018, public transfers among rural households in the bottom quintile almost doubled, driven by the increased coverage of rural pensions, the expansion of social assistance, social insurance and social assistance benefits, and the introduction of universal health care with a basic reimbursement package extended to rural areas.

Since the 2000s, policy makers have turned to place-based fiscal support, public investment targeting rural areas and lagging provinces, and social assistance transfers to address growing concerns over inequality even as poverty kept declining. Disparities between urban and rural areas and between Eastern and Western regions rose in the first two decades of China’s economic transformation. In response, starting in the mid-2000s, public investments in lagging regions combined with a rise in the minimum wage, the end of agricultural taxes, and an increased role for social protection policies helped narrow the urban-rural and regional gaps (World Bank, 2020). Income inequality, as measured by the Gini coefficient reported by the National Bureau of Statistics (NBS), peaked in 2008, declined for several years, and has recently stabilized at a relatively high level. Still, with a Gini coefficient at 46.7 in 2022 (latest available estimate), inequality remains high for China’s level of development.

Reducing inequality remains an important priority as China pursues its longer-term development objectives. It is well recognized that the economy will need to rebalance from an investment- and export-led model based on highcarbon industry and low-cost, labor-intensive manufacturing toward one led by domestic consumption, services, and increases in productivity (World Bank and DRC, 2019). A larger share of income for the bottom of the distribution could support that transition, as poorer households tend to spend a larger share of their marginal income. China’s green transition can also be facilitated through policies to ease labor mobility from high-carbon to lowcarbon sectors, as well as measures to strengthen the social safety net to ensure that those adversely affected by the transition are not left behind (World Bank, 2022c). In addition, China’s population aging requires further investment in human capital potential to compensate for a shrinking labor force (World Bank and DRC, 2022). Closing gaps in access to quality public services will be key to ensuring equal economic opportunities and increased social mobility for future generations. Recognizing the challenge of inequality, China’s government has made achieving “common prosperity” a priority. Policy makers continue to target sufficient economic growth that creates jobs and boosts household incomes. In addition, they also emphasize “the roles of taxation, social security, and transfer payments in regulating income distribution”.

How governments spend and collect revenues can have implications for inequality. When essential services such as education are provided free of cost to segments of the population who may otherwise be unable to send their children to schools, public resources are redistributed to close income gaps between the rich and the poor. The same effect is achieved when targeted cash assistance is provided to the poorest and the most vulnerable members of society. Conversely, there may be instances in which certain subsidies provided by the government accrue more to 2