Spatial Price Differences and Inequality in the People's Republic of China : Housing Market Evidence

The large literature on regional inequality in the People's Republic of China (PRC) is hampered by incomplete evidence on price dispersion across space, making it hard to distinguish real and nominal inequality. The two main methods used to calculate spatial deflators have been to price a national basket of goods and services across different regions in the country or else to estimate a food Engel curve and define the deflator as that needed for nominally similar households to have the same food budget shares in all regions. Neither approach is convincing with the data available. Moreover, a focus on tradable goods such as food may be misplaced because of the emerging literature on the rapid convergence of traded goods prices within the PRC that contrasts with earlier claims of fragmented internal markets. In a setting where traded goods prices converge rapidly, the main source of price dispersion across space should come from nontraded items, and especially from housing given the fixity of land. In this paper we use newly available data on dwelling sales in urban PRC to develop spatially-disaggregated indices of house prices which are then used as spatial deflators for both provinces and core urban districts. These new deflators complement existing approaches that have relied more on traded goods prices and are used to re-examine the evidence on the level of regional inequality. Around one-quarter of the apparent spatial inequality disappears once account is taken of cost-of-living differences