In this empirical study, we test the relationship of Chinese urban productivity and city size. Using over 119 790 firm-level production data cross 28 industries from the Third National Industrial Survey, along with the urban population data of 224 cities, we find strong and prevailing significant agglomeration economies in Chinese urban areas. The estimated average agglomeration elasticity is around 0.051, implying that every doubling of city size will provide a 3.6 per cent gain in firm productivity. The breakdown analysis suggests that, based on current data, the major source of the agglomeration advantage comes from localisation economies-benefits from the concentration of firms of the same industry within one geographical area-rather than urbanisation economies-externalities from urban development itself. The maximum size study also suggests that, while most Chinese cities have yet to grow to demonstrate the full strength of agglomeration economies, many Chinese industries have reached the 'optimal' industry size within a 'given' urban area.
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