The long-term evolution of income polarisation in China, 1995-2018

Based on data from the Chinese Household Income Project (CHIP) and the recently extended "relative distribution" method, this paper analyses the long-term evolution of income polarisation in China from 1995 to 2018 and identifies some of the drivers of the observed changes in polarisation during these years. The results show that although income inequality in China continued to expand from 1995 to 2018, income polarisation experienced a historic reversal, as it decreased significantly between 2013 and 2018 due to decreases in polarisation in both the lower and upper tails of the distribution. Among the factors driving these changes, endowment factors such as urbanisation and increased educational attainment are identified as the sources of declining polarisation at the bottom of the distribution, whereas declining returns to education and employment are the main reasons for the reduced polarisation at the top. Additionally, the polarisation between urban and rural areas significantly decreased from 2013 to 2018, while the middle class also expanded apparently, thus contributing to the historic decline in overall polarisation during these years.