Decomposition of the impact of government and private transfers on income inequality in China

Abstract This article investigates the redistributive effects of government and private transfers on income inequality in China, based on data from China Family Panel Studies (CFPS) during 2012–2020. The results indicate that, first, both government and private programs have inequality‐reducing effects and the effect from the government is much larger. More specifically, old‐age pensions have the largest inequality‐reducing effect, followed by government subsidies, private transfers, and charity donations. In urban areas, old‐age pensions have larger redistributive effects, while in rural areas, government subsidies, private transfers, and charity donations contribute to lower inequality. However, compensation for land expropriation and housing demolishment is inequality‐increasing. Moreover, the redistributive effects of the transfers are highly driven by their budget size rather than their targeting.