Market-Oriented Reforms and Wealth Inequality in China

China's widening wealth inequality over the last two decades is a microcosm of the contemporary growth of global wealth inequality. By constructing a dynamic general equilibrium (DGE) model with an incomplete market and idiosyncratic shocks, we take the relaxation of private enterprise entry and easing of financial constraints as representatives of China’s market-oriented reforms to theoretically analyze their impact on wealth inequality. We find that the model-simulated results fit the real wealth distribution and changing trends in China between 1995 and 2015, and the reform of private enterprises entry explains most of the expansion of the wealth gap compared to financial reform. By counterfactual simulations, we further verify the mechanisms of the two reforms—the income heterogeneity and savings rate mechanisms—and find that, under the combined force of both mechanisms, the relationship between market-oriented reforms and wealth inequality exhibits an inverted U-shaped relationship. Through further experiments, we confirm that China reached the Kuznets turning point before 2015. With the deepening of market-oriented reforms, China’s wealth inequality has shown a downward trend.