China’s poverty ‘eliminated’ but substantial inequalities remain

Despite the Chinese government declaring that absolute poverty has been eliminated in China, its poverty alleviation efforts have done little to address growing inequalities. In fact, Chinese policymakers now widely recognise income inequalities as a threat to sustainable development. Yet the government’s approach to the issue is unlikely to change, because poverty alleviation continues to be seen through a rural-urban issue even as inequality within rural areas and cities continue to grow.

Last December, China’s leader Xi Jinping announced that the goal of eradicating absolute poverty in China, and for the country to become a “moderately prosperous society” had been achieved. A milestone set in 2012 when Xi came to power, the celebratory announcement coincides with this year’s 100th anniversary of the Chinese Communist Party. Indeed, the eradication of absolute poverty has been hailed by official media in China as a major accomplishment under Xi’s leadership.

There is no doubt poverty has massively diminished over the last decades, even though China’s current poverty line, set in 2011 at RMB 2,300 per year at constant 2010 prices, is lower than the World Bank’s recommended extreme poverty line.

China under Xi Jinping has allocated unprecedented funding towards poverty alleviation. In 2020 alone, according to official budgets, the central government allocated CNY¥146 billion in poverty reduction funds, more than six times the amount in 2010. The government also reformed poverty alleviation governance, including measures such as stricter monitoring of local officials and better targeting of beneficiaries to aid the fight against corruption and misallocation of public funds.

In essence, however, the government has doubled down on a traditional approach to poverty alleviation pursued since the 1990s: funding infrastructure construction and local industry to boost economic development. Local county budgets reflect this trickle-down economics approach. In these local budgets, typically between 50 and 75 per cent of poverty reduction funds are allocated to infrastructure construction.

The other major component of spending is on supporting local businesses. In ‘employment bases’ schemes, business owners pledge to hire workers from low-income households in exchange for government subsidies. Poor households are also encouraged to rent out their land to cooperatives in exchange, effectively, for subsidies. In counties officially labelled as “poverty-stricken” (pinkun xian, 贫困县), local businesses also get preferential treatments in land use and taxation.

In other words, in China’s version of “trickle-down economics”, business owners are nurtured, funded, and supported by the state, but they are required to give back by providing employment and income opportunities to the local population. In practice,  these business owners often capture the funds while paying only lip service to poverty alleviation requirements. For instance, an interviewee explained that, as a common practice, factory owners had poor households sign their names to say they were working there, while in fact they were not.

By contrast, poverty alleviation funds rarely go to health, education, pensions, and direct subsidies for poor households. One reason is that most of the direct financial help to poor households is given in the form of social insurance, which is included in general budgets rather than poverty alleviation budgets. It is given, in particular, through the dibao (低保), a minimum livelihood guarantee payment for people below the poverty line. But dibao expenditure has stagnated in absolute terms, and decreased in proportion of central government expenditure — from 0.8 to 0.75 per cent between 2015 and 2019. In fact, despite the increase in the rural dibao standard (the amount received by each recipient per year), the number of local recipients is steadily decreasing.

More fundamentally, Chinese local governments’ reluctance to spend poverty alleviation money on direct subsidies to poor households is related to how they conceive poverty and state support. In interviews, local officials expressed a widely-held belief that the poor must become self sufficient and enterprising to escape from poverty. To illustrate, an opinion piece published by People’s Daily and written by a member of the Shaanxi Province party committee’s standing committee argued that: “After escaping from poverty, [poor people] no longer need the minimum living guarantee provided by the social safety net.” A long-term social safety net would “force the poor population into a passive position of accepting relief, and fail to spur enthusiasm for life and work,” this official asserted.

Generally speaking, welfare spending in China has remained very low in comparison to OECD countries. In 2020, China spent 7.8 and 13 per cent of general government expenditure on health and social protection respectively, compared to about 20 and 35 per cent in OECD countries.

Overall, the trickle-down approach to poverty alleviation has been unsuccessful in reducing China’s massive income inequalities even though it has been officially successful in eliminating absolute poverty. According to the National Bureau of Statistics data analyzed by the CEIC, a private macroeconomic database, China’s Gini coefficient has risen since 2015, and reached 0.47 in 2019, a level higher than the OECD average of 0.32. This increase comes after a decade of decreasing Gini coefficient for China.

Chinese leaders are aware of this income inequality problem, and there are now signs of renewed attention to this problem. China’s 14th Five-year plan (2021-2025) released in March 2021, for instance, highlighted concerns associated with “the large regional development and income distribution gap between urban and rural areas”. The plan calls for “improving the assistance mechanism for rural low-income population and underdeveloped areas, maintaining the overall stability of major assistance policies and financial investment, and continuing to promote the development of poverty alleviation areas.”

But these are not signs of a new approach. In February 2021, the State Council Leading Group Office of Poverty Alleviation and Development, a high-level agency in charge of poverty alleviation, was officially replaced by the new National Rural Revitalization Bureau headed by a senior agriculture official.

The subordination of poverty alleviation policies under the Rural Revitalization campaign indicates that Chinese leaders still see poverty as linked to regional development imbalances and the urban-rural divide. While regional imbalances are indeed an issue, inequalities within rural areas are also high — even higher than inequalities within many urban areas. The current policy approach, focusing on trickle-down mechanisms and privileging support to infrastructure and established companies instead of fiscal redistribution, is unlikely to fundamentally address the growing inequalities.