A Note on Income Convergence among China, Hong Kong and Macao

Hong Kong and Macao were re-united with China in the late 1990s as two special administrative regions (SARs). Over the last half century, they were China’s good examples of economic development, windows of openness and investors. However, due to historical reasons, China lagged far behind Hong Kong and Macao in terms of per capita incomes. The income gaps widened before China’s economic reforms started in the late 1970s but have been reduced since then. This paper analyses the trend and studies the determinants of income convergence between China and its two SARs over a period of more than 40 years. We find no evidence of convergence in the pre-reform period, but strong evidence of both absolute and conditional β-convergence in the post-reform period. Over the reform period, the pace of convergence is less than 1% per annum without controlling for trade and more than 2% conditional on trade. Income convergence of China with its SARs was achieved against a rising trend of inequality within the Chinese provinces themselves.