How Does Real Exchange Rate Influence Income Inequality Between Urban And Rural Areas In China?

The channels through which the real exchange rate influences urban/rural per capita real income inequality are analyzed using yearly data for 28 Chinese provinces. Due to the higher share of tradable goods produced in urban than rural areas, the real depreciation of the Chinese currency raised the urban bias, contrary to the effect usually expected. This rise was, however, mitigated because of the impact of the exchange rate on the urban/rural consumer price ratio, real public wages, and the ratio of industrial/agricultural protection rates. It disappeared for coastal provinces due to the strong development of outward-oriented rural industrial activities.