Guanxi and Income Inequality

Guanxi, loosely translated as “connections”, is the core structure of Chinese society. This paper proposes a measure of guanxi to capture its multiple-dimensional nature and studies its impact on income inequality, using China household finance survey data. In line with the seminal theory of Fei Xiaotong (1992, From the Soil: the Foundations of Chinese Society), principal components analysis selects three main components to construct Guanxi Index: static relationships, authority and power, and means to maintain/develop connections. This paper also shows that guanxi, besides wealth concentration and human capital, is a key factor determining income inequality, and becomes quantitatively more important than human capital for the top 25 percent of urban households.