Xiahe's shops show both China's progress in providing a basic standard of living to its poorest and the challenges it faces in closing the urban-rural income gap and modernising its economy.

"The reality of Chinese industrial policy over the years has been essentially the idea that a wide range of consumer goods has to be made available to the largest number of people at the lowest possible cost," said Arthur Kroeber, director of Beijing economic research firm Dragonomics.

That strategy ensures that the benefits of growth are more broadly shared and lets the poor feel their lives are improving, even as the gap between the haves widens, Kroeber said.

Urban incomes grew 3.4 percentage points faster than rural ones last year, taking them to about 10,500 yuan ($1,320) and 3,260 yuan a person respectively.

But the strategy has its dark side.

For one, the drive for low-cost goods creates serious product and food safety issues, especially in remote areas, said Min Tang, chief economist in Beijing for the Asian Development Bank.

"This is dangerous. A lot of poisonous, low-quality products are most likely shipped to those places," Tang said.

The imperative of providing cheap goods for all also hobbles the economy, said Kroeber -- whether in achieving economies of scale, moving up the value chain, protecting intellectual property rights or improving environmental standards.

"All these things like IPR and environmental standards and so forth, this raises costs," he said.

"Up until now, frankly, there has been no serious interest in maintaining environmental standards precisely for that reason, because providing employment and the availability of cheap goods were much more important economic goals," he said.

That is changing gradually, Kroeber said, but is bound to be a long, drawn-out process.

1

2

3