Understanding Regional Price Convergence Clubs in China

This study explores the existence of price convergence clubs for various goods in China and aims to understand the determinants of their formation. Novel empirical patterns in the domestic cross-city price mechanism are uncovered by use of retail price data for individual goods in 36 major cities in China. By employing a nonlinear factor model, it is shown that there is no evidence of national price convergence across Chinese cities for more than half of the goods in the sample (55 out of 102 goods), yet cities may form regional convergence clubs. These clubs emerge because of regional differences in the cost and share of traded and nontraded inputs used in the production of goods. The data show that China had been moving toward a nationally integrated market up until the early 2010s, but in the past decade, China's domestic market has become more fragmented. Thus, further economic reforms may be necessary to reinforce the process of domestic market integration.