China’s economic inequalities between rural and urban regions were high but stable during the
centrally planned period. Since the inception of reforms in 1978, the disparities have exhibited a marked
cyclical pattern: the declines in early years were followed by a period of increases and then by renewed
declines. We find that the sharp sectoral divide in the planning episode was a result of industrial
development strategy, but since the reforms the politically powerful urban population has pressured the
government for fast income growth using various transfer programs. The central government has
maintained an urban bias in order to preserve regime stability and political legitimacy. Our analysis
indicates that, although the urban coalition may pressure the state for favors, political activities are not a
necessary condition for the existence of an urban bias. As this study on China shows, the pursuit of
industrial development strategy alone can result in a rural-urban divide. We suggest that removing
distortions in factor markets is the policy reform most needed to bridge China’s rural-urban gulf.