Building Bridges or Walls? Understanding Urban-Rural Price Convergence in China

Market liberalization reforms in China have led to greater domestic market integration. However, significant urban-rural price differences suggest that segregation between urban and rural markets persists in China. We study the evolution of price differences between urban and rural areas across 25 Chinese provinces over the period 1985-2020. Firstly, we record a substantial and persistent gap between urban and rural price levels within each province. Secondly, we find that this gap narrowed after China implemented the Price Law, which is suggestive of deeper urban-rural integration associated with policy changes. Additionally, we observe notable differences in urban-rural price gaps between provinces, however, using the log-t test, we find evidence of regional convergence in these price gaps. Finally, we investigate the impact of transport infrastructure development on urban-rural price differences. Using spatial econometric analysis and instrumental regressions, we find that road and railway construction has a significant negative effect on the urban-rural price divide, suggesting that infrastructure development facilitates market integration between urban and rural areas in China.