Regional Capital Mobility in China: An Endogenous Parameter Approach

Abstract

In this paper we empirically evaluate inter-regional capital mobility in China from 1978 to 2012. We measure the degree of capital mobility as the ability of regions, each as a representative consumer, to engage in intertemporal consumption smoothing through running external imbalances. We estimate a correlated random coefficient model which takes into account the potential correlation of capital mobility with output. Our results show that barriers to capital mobility across regions are still high in China. However, there is a slight increase in capital mobility over time. After 2000, the improvement of the degree of capital mobility becomes stagnant. This may reflect the prevalence of capital market distortion in China.