Contrary to Kuznets' inverted “U” hypothesis and anecdotal evidence, China's rapid growth after 1978 was not associated with an increase in inter-provincial income inequality before 1990. Neither aggregate measures of inequality nor statistical tests of convergence indicate increasing inter-provincial inequality. Analysis of the income rankings of individual provinces and their positions on Lorenz curves as well as a regression analysis model of conditional convergence all indicate that changes in interprovincial inequality in China, or the lack thereof, are explained by the rapid growth of a group of lower-middle income coastal provinces closing the income gap between themselves and the high income heavy industrial provinces of Dongbei and the provincial level cities. The relative position of poor provinces did not improve.; Studies of international income inequality typically use purchasing power parity as the yardstick of comparison. This study develops a local cost of living index (LCLI) analogous to a purchasing power parity exchange rate for 17 of China's 30 provinces for the years 1978–1993. Changes in local cost of living differences during that time period are examined. The relationship between LCLIs and provincial GDP per capita is tested. LCLIs based on two different indicators of provincial inflation, retail price indices (RPI), and implicit GDP deflators are compared. In 1978 there was no relation between local cost of living and provincial per capita GDP. Cost of living adjustment was as likely to increase inequality as decrease it. By 1993 there was a statistically significant positive correlation between local cost of living and provincial per capita GDP. The absolute effect, however, was still small. A province with Per Capita GDP 50% above the national average would be expected to have a 5% higher cost of living.; The overall conclusion of the study is that in the early phase of the market reform process initial conditions are more important than the tendencies of the market process. In the early reform period distortions in the spatial and sectoral pattern of China's economy and price system must be unwound before the tendencies of market forces can put their own stamp on the economy.
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