Is the Provincial Capital Market Segmented in China?

Abstract This paper evaluates the degree of provincial capital mobility in C hina since 1978 by estimating the saving‐retention rate in the Feldstein and Horioka framework. It is found that the estimate of the saving retention rate tends to be biased downward if we fail to decompose the investment and saving rates into the private and government components. After the decomposition, we find that the private capital mobility was low prior to the 1990s, but improved notably in the more recent period. We also find that the saving‐retention rate for the government sector remains negative throughout the sample, which can partially be explained by the government's reallocation of capital from the more productive regions to the less productive regions. Comparing the results of C hina with those of J apan shows that J apan had a much higher degree of prefectural capital mobility than C hina before the 1990s, but the gap gradually closed up afterwards.