How Do Cities Matter In Chinese Economy?

We establish a Rosen-Roback spatial equilibrium model which decomposes the total economic growth into the change of labor input,TFP and wage differences.We calculate the model-based contribution of the cities to Chinese aggregate economy.By using data of 285 cities from 2002 to 2015,we find out that East China region,South China region and north China region are the three regions that have the most influence on China's economic development,the model-based contribution of these three regions is 95.08%,higher than the simply calculated contribution(70.24%).The model-based contribution of Northeast China region is-14.28%.The model-based contribution of the top ten municipalities,provincial capitals and autonomous regions is 54.29%,of which the contribution of TFP changes is 58.27%,the contribution of wage differences is-11.99.%,and the contribution of labor input is 8.02%.The model-based contribution of the Beijing-Tianjin-Hebei,the Yangtze River Delta and the Pearl River Delta regions to the aggregate economic growth can be more than 72%.The model-based contribution of the Yangtze River Delta is 39.07%(18.22%higher than the simply calculated contribution)and that of the Pearl River Delta is 22.55%(8.37%higher than the simply calculated contribution).However,the model-based contribution of the Beijing-Tianj in-Hebei region is 10.55%,lower than the simply calculated contribution(12.28%).Factor decomposition shows that the positive impact of megacities on Chinese economy comes from the increase in TFP and the increase in labor input,while the megacities widen wage dispersion of the whole country,generating a negative effect on economic growth."Counterfactual" studies show that for the period 2002-2015,the top-five megacities increase the Chinese aggregate economy by 25.33%,and if the top-five did not enlarge the wage dispersion,then the aggregate economy would increase by 40.42%.Our research also shows that the overall development of the Yangtze River Delta and the Pearl River Delta regions is more balanced,while the Beijing-Tianj in-Hebei region still have a long way to go to reach the coordinated development.The main reason for the poor economic development in Northeast China is the low TFP,followed by the shortage of labor supply,although the change of wage differences has brought a little positive impact,but still not enough to make up for the low TFP and the shortage of labor supply.Since no previous study has used city level data in China to analyze the impact of cities on Chinese economy,our research will fill this gap.According to the empirical results,this paper puts forward three policy suggestions,one is to further reduce the wage dispersion in China,the second is to further coordinate the Beijing-Tianj in-Hebei region for more balanced development,the third is to promoting technological progress and reducing labor force outflow in northeast China.