A Study On The Impact Of China 's Financial Development On The Income Gap Between Urban And Rural Residents

As a core part of importance, Finance has had consistently effect on the social and economic development. However, even though the financial market has experienced a rapid development during the past thirty years, it is still immature because of late starting. What’s more, the effect that financial development put on the urban-rural income inequality has long been a disputable topic and is widely researched at home and abroad. Based on the previous research achievements, we take empirical research with panel data of27provinces from1978to2010.Firstly, we describe the Chinese financial market from five parts, which are institutions distribution, dimensions, competition, sector efficiency and financial channel, and get the conclusions that the financial dimensions has been enlarged and the market is more completed, even though the stock and bond market are still relatively small. Meanwhile, the situation of rural financial market is not optimistic because of low financial asset stock level compared with urban region and single access to financial resource and little credit aid. For the urban-rural income inequality, it has risen with fluctuation.Secondly, this paper presents two channels that financial development has impacted on the income inequality:the direct and indirect. The direct channel includes the differences between urban and rural in the investment and credit activities because of limited financial service and products and credit preference between urban and rural area from those financial institutions. Financial development realized its indirect impact through Economic growth since financial activities will impact the deposit rate and investment rate, and thus influence the gross supply and gross demand for the whole society.Thirdly, with panel data of27provinces from1978-2010, and use Theil index to measure the income gap, we make a fixed effects model to make empirical research on the relationship between financial development and income inequality. The results show us that, the financial development is currently enlarging the income gap, however, the relationship between financial development and income inequality meet the Kuznets curve, so as long as the financial development reaches a inflection point, the income gap will narrow because of lower financing cost and more access to financial services and products for rural residents, as well as the ease of unbalanced resource allocation problem between urban and rural areas. It must be mentioned that China has currently not reached the inflection point, so the financial development will continue widening the urban-rural income inequality in the near future.At last, we present two suggestions. The first is to accelerate the build of financial market, promote the deepening and widening progress of financial market. The second is to increase the financial service in rural area, optimize its investment structure and financial allocation system, and improve the labor productivity as well.