China and the World Economy Research Paper 2006 / 37 On Income Convergence among China , Hong Kong and Macau

Hong Kong and Macau 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. Due to historical reasons, China lagged far behind Hong Kong and Macau in terms of per capita incomes. However, rapid economic growth in China over the last three decades must have brought about a significant convergence of the three economies. This paper aims to analyze the trend and studies the determinants of income convergence between China and its two SARs. Both parametric and non-parametric techniques are employed to quantify the pace of convergence on per capita incomes in Hong Kong, Macau and the Chinese provinces 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.