Inter-regional Integration of Metropolitan Cluster among Shanghai, Taipei, Hong Kong, and Macao

Abstract

The economic integration of the metropolitan cluster of the four cities among Shanghai, Taipei, Hong Kong and Macao have been developed speedily in recent years, especially after both mainland China and Taiwan joined the WTO at the end of 2001. Based on the principle of the law of one price, this paper examines the inflation rate differentials among these four cities to evaluate the degree of economic integration among them. Applying the state-of-the-art time series unit root tests, it was revealed that the degree of real integration among Taipei, Hong Kong, and Macao is higher than that among Shanghai, Hong Kong, and Macao. Shanghai has some economic integration with Taipei, probably it was driven by the complemtarity of the two technology industries across the strait. However, the integration is far from complete within these four cities. This signifies the importance of policy support during the inter-regional integration process. The development of a free trade area among them, and with mainland China and Taiwan as a whole, may also promote the regional integration endogenously.