Abstract: This paper tries to analyze the impact of financial development on the income gap based on the inter-provincial panel data. The results of the empirical analysis show that the structural factors in China’s financial development have significant impact on the urban-rural income gap. The findings are as follows: (1) there is an inverted U-shaped relationship between the financial development and the urban-rural gap in general, but the evidence for the inverted U-shaped relationship cannot be found within the three bigger regions; and the financial development in the regions with higher level of economic development has smaller power to widen the gap. (2) The credit flowing to the city can play a significant role in widening the urban-rural income gap; while in the eastern region with higher efficiency of fund allocation in rural financial institutions, the credit flowing to rural areas has significantly narrowed the urban-rural gap. (3) The increase of the credit size of the four major state-owned banks has widened the urban-rural income gap, while the development of small and medium-sized banks can play a role in restraining the widening urban-rural income gap, especially in the central region where a large number of rural labors is outgoing.

Key words: financial development; flow of credit; small and medium-sized banks; urban-rural income gap