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In a recent paper Pedroni and Yao (2006) present strong evidence suggesting that Chinese regional output is diverging, a result that strongly contradicts the goal of China's government of a balanced wealth-creation across regions. This paper provides an in-depth analysis of the reasoning behind this finding. The authors' main result is that the divergence does exist, even when new data and more advanced methods of analysis are used. They also find that it has both an idiosyncratic and a common component. Hence, the increased output inequalities observed at the regional level is due to both region-specific disparities and to disparities between clubs of regions.
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