An analysis of economic integration between mainland China, Hong Kong and Macau

This research contributes to the literature of economic integration. Mainland China, Hong Kong and Macau are discussed together for the first time, in multiple angles, to assess the extent of their economic integration for both the pre- and post-reform periods, on both the Greater China (which covers Mainland China, Hong Kong and Macau) and regional levels. The impacts of economic integration on income convergence as well as productivity convergence for these Chinese economies, which have been neglected in other studies, are also studied. In addition, the connections, the policy implications and future prospects of these three mechanisms are also reviewed at the same time. In the analyses of economic integration, the trade intensity and trade complementarity indices, correlation matrix, the Johansen Cointegration Test and the Vector Error Correction Model (VECM) are employed. In light of the scenario of income convergence, the coefficient of variation, the Mankiw, Romer and Weil (1992)'s estimation method (MRW method) and the Augmented Dickey-Fuller (ADF) test for Unit Root are applied to examine the issues of deterministic and stochastic income convergence between Mainland China, Hong Kong and Macau. This works to investigate if the income level of Mainland China or some of its provinces can catch up with that of Hong Kong and Macau. As for the process of productivity convergence, the stochastic frontier approach is advocated to estimate the growth rate of total factor productivity (TFP) and its components for Mainland China, Hong Kong and Macau on the provincial level. Making use of the MR W method, the issue of productivity convergence is also tested to see if Mainland China can grow faster than Hong Kong and Macau with respect to total factor productivity. The empirical results indicate a long-run cointegration relationship between the per capita real gross domestic product (RGDP) of Mainland China, Hong Kong and Macau. Incorporating the highly intensive and complementary trade relationship and the tightly correlated income levels, it is believed that a high extent of economic integration has been achieved between Mainland China, Hong Kong and Macau after 1990. From the VECM, the short-run dynamic of Hong Kong's per capita RGDP Granger causes that of .. Guangdong's, while the per capita RGDP of Mainland China and Guangdong Granger causes that of Macau are also observed. In the case of income convergence, absolute ~-convergence is found between Mainland China, Hong Kong and Macau in the post-reform period on both the Greater China and regional levels, and international trade has contributed to accelerate the process. Subsequently, it has brought about 8-convergence between these economies. Despite the occurrence of β- and ð-convergence, stochastic convergence is rej ected in the cointegration and ADF tests which imply that the income convergence process between these economies may not come to an end to stabilize. In the discussion on productivity, it is found that the TFP growth pace of Mainland China is faster than that of Hong Kong and Macau since the 90s, and β-convergence in TFP between Mainland China, Hong Kong and Macau, in which the initially less efficient or poorer Mainland China has a higher TFP growth rate than the initially more efficient or richer Hong Kong and Macau, is also observed in the post-reform period. Last but not least, the economic reform of Mainland China is regarded as the ultimate driving force for the processes of economic integration, income and productivity convergence