Urban Bias in Capital Allocation: Evidence From China

Piyusha Mutreja, Abdulaziz B. Shifa, Wei Xiao

Economic Letters, October 2026

Abdulaziz Shifa

Economics Department

China

State & Local Government

Urban Issues

Economic Letters

Abdulaziz Shifa

Abstract

Urban bias in resource allocation is central to development debates, yet direct evidence on differential access to capital remains limited. Using firm-level data from China, we infer the cost of capital from returns and compare urban and rural firms within the same prefecture.

We find that urban firms have significantly lower returns, indicating cheaper access to capital. This gap is large for state-owned enterprises (SOEs) but negligible for nonstate firms, and is robust across specifications.

The results suggest that urban bias in capital allocation is primarily driven by state-directed investment rather than private-sector constraints.