This paper provides an overview of the evolution of income inequality and poverty in
China from 1987 to 2002, documenting significant increases of inequality within China’s
urban and rural populations. In rural areas, increased inequality is primarily related to the
disequalizing role of non-agricultural self-employment income and the slow growth in
agricultural income from the mid-1990s onward. Poverty persists, and tied in part to slow
growth in agricultural commodity prices. In urban areas, the declining role of subsidies and
entitlements, the increase in wage inequality, and the layoffs during restructuring have fueled
the growth in inequality within urban areas. Poverty levels, however, are very low. China
should give more emphasis on education, training, and other human development efforts in
its poverty reduction strategy since return to education increased rapidly and became a
major source of inequality. A nationwide “social safety net” and an effective redistributive
taxation system should be adopted and implemented to ensure that the poor can benefit
from the fruits of rapid economic growth.