Whither China? Reform and economic integration among Chinese regions

- We consider the changing nature of economic integration in China between 1955 and 2011.
- We find that regional demand shocks have become more similar during this period.
- In contrast, supply shocks have become more dissimilar.
- Interprovincial trade and factor endowments make regional shocks more symmetric.
- Foreign trade and inward FDI have little effect on the symmetry of shocks.

This paper investigates the changing nature of economic integration in China. Specifically, we consider business-cycle synchronization (correlation of demand and supply shocks) among Chinese provinces during the period 1955-2011. We find that the symmetry of supply shocks has declined after the liberalization initiated in 1978. In contrast, the correlation of demand shocks has increased during the same period. We then seek to explain these correlations by relating them to factors that proxy for interprovincial trade and vulnerability of regions to idiosyncratic shocks. Interprovincial trade and similarity in factor endowments tend to make shocks more symmetric. Surprisingly, foreign trade and inward FDI have little effect on the symmetry of shocks.