Source: February 25

While China has recently grown to become the world’s second largest economy, rising inequality poses serious risks to the country’s internal stability. The leadership has given greater priority to economic before political liberalization and assumed that rapid growth would be enough to maintain social balance. But the increasing incidence of protests and emerging tensions have raised concerns about the future. In testimony before the U.S.-China Economic and Security Review Commission, Yukon Huang describes the growing divide between coastal and inland, as well as urban and rural Chinese and outlines steps the Chinese leadership must take to avoid social unrest.

Policy Recommendations:

• Resist the urge to "artificially" move production inland: China has benefited enormously from “unbalanced” growth that has favored coastal cities over isolated inland areas. Rather than trying to shift production to these underdeveloped regions, China should instead concentrate on improving their well-being through more regionally balanced social programs and improved infrastructure links that facilitate the movement of people and goods.

• Oblige state corporations to pay higher dividends: China is unusual in that corporations have not been paying any significant share of their retained earnings to households or the government. Transfers to the budget through higher dividends stand to increase domestic consumption in social services, moderate growth in industrial investment, and help offset the bias in favor of exports.

• Liberalize internal migration and the “hukou” system: A holdover from the days of central planning, the “hukou” system establishes a person’s official place of residency and determines access to social services and housing. Liberalizing the system would increase labor mobility and significantly reduce disparities between urban and rural Chinese by making it easier for the poor to access better jobs.

“Even with rapid growth, widening disparities are now threatening the fabric of society,” Huang writes. “How China handles this complex set of issues will have profound implications for internal security.”