A Provincial View of Global Imbalances: Regional Capital Flows in China

This piece zooms in on the drivers of province-level capital flows in China. They are much the same as those driving aggregate flows: expected rising prices of non-tradables such as housing, education and social services, and to a lesser extent future investment growth. In addition to the earlier aggregate analysis, here we exploit the heterogeneity of capital flow patterns across provinces and correlate them with province-level characteristics. The results buttress the view that the usual-suspect financial frictions (‘savings wedges’) - such as lack of access of private firms to credit and a lack of domestic investment opportunities for households - drive surpluses.