Regional capital flows and economic regimes: Evidence from China

- Using provincial data from China, we analyze how the pattern of capital flows evolves over different economic regimes.
- We find the “allocation puzzle” that fast-growing provinces experience less capital inflows can be dated back to the pre-reform era.
- After the large-scale economic reform, the “allocation puzzle” becomes much less pronounced.

Using provincial data from China, this paper examines the pattern of capital flows in relation to the transition of economic regimes. We show that fast-growing provinces experienced less capital inflows before the large-scale market reform, contrary to the prediction of the neoclassical growth theory. As China transitioned from the central-planning economy to the market economy, the negative correlation between productivity growth and capital inflows became much less pronounced. From a regional perspective, this finding suggests domestic institutional factors play an important role in shaping the pattern of capital flows.