The Impact Of Financial Development On Urban-Rural Income Gap In China

It has been nearly 40 years since China’s reform and opening up, and China’s economy has made rapid development. The financial industry also has made a rapid rise. However, China’s urban and rural residents’ income gap is widening.This paper briefly reviews the course of China’s financial reform. Also, this paper describes the present situation of urban-rural income gap and analyzes the direct and indirect factors affecting the gap. At the same time, considering China’s specific context, this paper analyzes the theoretical logic and pathways that financial development affects urban-rural income gap. Based on overlapping-generations(OLG) model,relating the residents’ income to utility, this paper builds a theoretical base. The result shows that China’s urban-rural income gap is closely geared to financial development.Further, using China’s provincial panel data of 31 cities from year 2004 to year 2013 to build a threshold panel data model. In the model, defend the ratio of the added value of the financial sector to gross domestic product as the financial development variable, which is the threshold variable. Meanwhile, defend the ratio of urban residents per capita disposable income to rural residents per capita net income as the urban-rural income gap variable. The result shows that the empirical model has two threshold values, which are 0.022 and 0.097 respectively. When the value of financial development variable is less than 0.022, financial development narrows the income gap significantly; when the value is higher than 0.097, financial development expands the income gap significantly. By studying the sample data, the result shows that only two provinces, Beijing and Shanghai, meet the command that the value of financial development variable is higher than 0.097, and the value of financial development variable from most of the central provinces meet the command that the value is less than 0.022. This finding confirms the non-equilibrium effect of financial development. In addition, openness, government expenditure and education have a significant impact on the urban-rural income gap. Finally, the paper gives out some policy recommendations.