Three circuits of capital and urbanization transformation from the perspective of capital in China

The theories surrounding the three circuits of capital have been extensively studied and developed within the context of developed countries. However, there is a scarcity of empirical evidence from the developing world. China, as the largest developing economy, has experienced rapid urbanization with population migration and capital flow, which has garnered significant attention. In light of these circumstances, this study aims to analyze the temporal dynamics of capital switching between the three circuits and utilizes panel regression analysis to explore their growth effects and driving forces across Chinese provinces. This study reveals several notable observations. Firstly, it is evident that most provinces have witnessed the capital switching out of the production sphere. Secondly, regarding the impact of three circuits of capital on urbanization transformation, a sequence characteristic is observed. Specifically, the primary and secondary circuits of capital have initially displayed a weakening positive effect on urban economic growth, which eventually becomes statistically insignificant. Conversely, the tertiary circuit of capital exhibits a robust and continuously significant positive impact. Lastly, the determinants differ across three circuits of capital. The local fiscal deficit is found to have a significant positive effect on the primary circuit, while the scale of social credit stands out as the most notable factor for the tertiary circuit of capital. Moreover, the study uncovers the significant role played by institutional factors and financial development in promoting the secondary circuit of capital and facilitating fixed investment in the urban built environment. These findings have important implications for enhancing capital flow and achieving the goal of new-type urbanization in China. It also highlights the importance of creating a favorable institutional environment that encourages investment and fosters a thriving financial sector.