nep-cna New Economics Papers
on China
Issue of 2006‒01‒24
nineteen papers chosen by
Fang Zheng
Fudan University

  1. What%u2019s So Special about China%u2019s Exports? By Dani Rodrik
  2. China?s Emerging Tax Regime: Local Tax Farming and Central Tax Bureaucracy By Zhu, Z.; Krug, B.
  3. Trade, Poverty and Employment: The Social Consequences of Integration with China By Lucio Castro; Daniel Saslavsky
  4. Deflationary Expansion: an Overshooting Perspective to the Recent Business Cycle in China By Gang Gong; Justin Yifu Lin
  5. Emissions Trading to Improve Air Quality in an Industrial City in the People's Republic of China By Krupnick, Alan; Bell, Ruth; Morgenstern, Richard; Anderson, Robert; Abegunawardena, Piya; Schreifels, Jeremy; Dong, Cao; Jinan, Wang; Jitian, Wang; Larsen, Steiner
  6. CEO Turnover, Firm Performance and Enterprise Reform in China: Evidence from New Micro Data By Takao Kato; Cheryl Long
  7. Foreign Direct Investment in China's Power Sector: Trends, Benefits and Barriers By Blackman, Allen; Wu, Xun
  8. Two decades of reform : the changing organization dynamics of Chinese industrial firms By Nabeshima, Kaoru; Yusuf, Shahid
  9. Links between the Indian, U.S. and Chinese Stock Markets By Heng Chen; Bento J. Lobo; Wing-Keung Wong
  10. Nonfarm activity and rural income inequality : a case study of two provinces in China By Luo, Xubei; Zhu, Nong
  11. Rebalancing Growth in China: A Three-Handed Approach By Blanchard, Olivier J; Giavazzi, Francesco
  12. Fiscal Decentralization and Local Public Good Provision in China By Xin-Qiao; Jie Bai
  13. Di Bao : a guaranteed minimum income in urban China? By Wang, Youjuan; Ravallion, Martin; Chen, Shaohua
  14. Environmental Goods and Services A Synthesis of Country Studies By Maxime Kennett; Ronald Steenblik
  15. Fast-Falling Barriers and Growing Concentration: The Emergence of a Private Economy in China By Sean Dougherty; Richard Herd
  16. Labour Protection in China: Challenges Facing Labour Offices and Social Insurance By Anders Reutersward
  17. International Capital Flows and U.S. Interest Rates By Francis E. Warnock; Veronica C. Warnock
  18. The Use of Economic Incentives in Developing Countries: Lessons from International Experience with Industrial Air Pollution By Blackman, Allen; Harrington, Winston
  19. The Ancillary Carbon Benefits of SO2 Reductions from a Small-Boiler Policy in Taiyuan, PRC By Krupnick, Alan; Morgenstern, Richard; Zhang, Xuehua

  1. By: Dani Rodrik
    Abstract: Much more than comparative advantage and free markets have been at play in shaping China's export success. Government policies have helped nurture domestic capabilities in consumer electronics and other advanced areas that would most likely not have developed in their absence. As a result, China has ended up with an export basket that is significantly more sophisticated than what would be normally expected for a country at its income level. This has been an important determinant of China's rapid growth. What matters for China's future growth is not the volume of exports, but whether China will continue to latch on to higher-income products over time.
    JEL: F1 O4
    Date: 2006–01
  2. By: Zhu, Z.; Krug, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: China like other transition economies needs to establish a tax system compatible with a market economy, in particular, an efficient tax administration system with capable tax bureaucrats. The paper singles out the general and China-specific features by which central government attempts to accompany economic transformation via tax farming to tax bureaucratisation in tax administration. Based on empirical study in two provinces this paper shows that without including local government agencies and their budgets, China?s fiscal federalism cannot be analysed and argues that China?s emerging tax system depends on the institutional and organizational design that shapes the interaction between central government, local governments and economic agents.
    Keywords: Tax Governance;Tax Farming;Tax Bureaucratisation;Fiscal Federalism;
    Date: 2005–12–21
  3. By: Lucio Castro (Maxwell Stamp PLC); Daniel Saslavsky (Inter American Development Bank)
    Abstract: This paper estimates the potential effects of a free trade agreement (FTA) between China and Mercosur on poverty, income distribution, welfare and employment. The case of Argentina, in particular, is investigated. To this end, partial equilibrium techniques are combined with micro econometric methodologies employing data from household surveys to examine the likely effects of an FTA with China on poverty and income distribution. We find that the FTA would result in a small reduction in poverty as well as an improvement in the income distribution. Highly disaggregated data at the industry level is used for the first time to estimate labor demand-output and wage elasticities in order to estimate the effects of an agreement with China on sectoral and aggregate employment rates. According to this, trade with the PRC did not have a significant effect on industrial employment, even in a period of swift trade liberalization like the nineties.
    Keywords: China, Import Competition, Trade and Labor Market Interactions, Employment, Income Distribution, Poverty
    JEL: F14 F15 F16 F17 L60
    Date: 2005–12–28
  4. By: Gang Gong (School of Economics and Managment, Tsinghua University); Justin Yifu Lin (China Center of Economic Research, Peking University)
    Abstract: Deflationary expansion has puzzled economists both in and outside China. We study this business cycles phenomenon within a model of discrete time dynamics. We find that deflationary expansion could be possible if driven by an overshooting in investment and if the state of the economy maintains high rate of growth. This expression is consistent with the recent time series variation of some key macroeconomic variables. The high steady state of growth could be explained by the current insttutional environment of China.
    Keywords: Deflationary Expansion, Overshooting , Business Cycle, China, growth, discrete time dynamics
    JEL: C62 E32 E50 P24
    Date: 2005–11
  5. By: Krupnick, Alan (Resources For the Future); Bell, Ruth (Resources For the Future); Morgenstern, Richard (Resources For the Future); Anderson, Robert; Abegunawardena, Piya; Schreifels, Jeremy; Dong, Cao; Jinan, Wang; Jitian, Wang; Larsen, Steiner
  6. By: Takao Kato (Colgate University, Columbia University and IZA Bonn); Cheryl Long (Colgate University, Stanford University and University of Electronic Science and Technology of China)
    Abstract: Using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002, augmented by unique data on CEO turnover, ownership structure and board characteristics, we estimate Logit models of CEO turnover. We find consistently for all performance measures including both stock return and various accounting measures that: (i) overall, CEO turnover is significantly and inversely related to firm performance though the magnitude of the relationship is modest; (ii) CEO turnover-performance link is stronger when the percentage of company shares owned by the largest shareholder is larger. Furthermore, insofar as stock performance is concerned, (iii) turnover-performance link is found to be weaker for listed firms still controlled by the state; (iv) the appointment of independent directors enhances turnover-performance link; (v) the listing suspension mechanism, i.e., the ST designation, adopted by China’s securities regulatory agency appears to be effective in improving turnover-performance tie; and (vi) listed firms with CEOs holding additional positions in the controlling shareholders have weaker turnover-performance link. Consistent with the "law and finance" approach to corporate governance and the literature on economic transition, our findings suggest that any fundamental improvement in China’s corporate governance will require a broad program that encompasses not only privatization but also laws and their effective implementation to provide better protection for investors.
    Keywords: executive turnover, firm performance, enterprise reform, corporate governance, ownership structure, China, and transition economies
    JEL: M52 M12 J33 P34 G30 O16 O53 G30 G15
    Date: 2006–01
  7. By: Blackman, Allen (Resources For the Future); Wu, Xun
    Abstract: In the early 1990s, hoping to reduce chronic electricity shortages and enhance the efficiency of Chinese power plants, China opened its doors to foreign direct investment (FDI) in electricity generation. Using data from an original survey of US private investors, official Chinese statistics, and other sources, we assess the volume and characteristics of FDI in China's power sector, its impact on energy efficiency, and the factors that limit this impact. Our five principal findings are as follows. First, the volume FDI in China's power sector will likely fall short of the government's 1995 - 2000 capacity expansion target by a substantial margin, most likely because of persistent institutional barriers to FDI. Second, to avoid the lengthy central government approval process for large plants and to minimize risk, early FDI tended to be in small-scale, gas- and oil-fired plants using imported equipment and located in coastal provinces. However, more recent FDI tends to be in larger coal-fired plants that use more Chinese equipment and tends to be located in the north as well as the east. Third, and perhaps most important, FDI is likely having a significant positive impact on energy efficiency. Almost a third of the 20 FDI plants in our survey sample use advanced efficiency-enhancing generating technologies, and a fifth are cogeneration plants. Fourth, the main factor that has hampered the contribution of FDI to energy efficiency is an institutional bias in favor of small-scale plants which are generally not as energy efficient as the large-scale plants. And finally, the most important barriers to FDI generally are uncertainty associated with the approval process of FDI projects, electricity sector regulation, and the risk of default on power purchase contracts.
  8. By: Nabeshima, Kaoru; Yusuf, Shahid
    Abstract: Since the early 1980s, China has begun gradually integrating with the global system. In doing so the country has moved toward its own unique brand of market socialism, which recognizes private ownership, and is adopting market institutions and pursuing industrial change within the framework of an urban economic environment. The process of transition has now permeated every corner of Chinese life and no organization has been left untouched. Yet industrial organization in China-especially in the state sector-has been slow to shed many of the distinctive structural characteristics of the old line Maoist era state enterprises. The main prong of the industrial strategy in support of urban change is ownership reform that transforms state-owned enterprises into corporate entities with majority state ownership or places them wholly in private hands, in the process also bolstering the incentives for and the dynamism of the private sector. While the central government spearheads the ownership reform initiative, in the majority of cases the actual implementation is in the hands of municipal, county, and prefectural governments that must coordinate their efforts with other factors influencing urban changes. This paper situates industrial change in China within the context of urban development and examines the interplay of broad reform strategy with local implementation, and its actual practice by the reformed firms.
    Keywords: Municipal Financial Management,Private Participation in Infrastructure,Economic Theory & Research,State Owned Enterprise Reform,Microfinance
    Date: 2006–01–01
  9. By: Heng Chen (Department of Economics, National University of Singapore); Bento J. Lobo (University of Tennessee at Chattanooga); Wing-Keung Wong (Department of Economics, National University of Singapore)
    Abstract: This study examines the bilateral relations between three pairs of stock markets, namely India-U.S., India-China and China-U.S. We use a Fractionally Integrated Vector Error Correction Model (FIVECM) to examine the cointegration mechanism between markets. By augmenting the FIVECM with a multivariate GARCH formulation, we study the first and second moment spillover effects simultaneously. Our empirical results show that all three pairs of stock markets are fractionally cointegrated. The U.S. stock market plays a dominant role in the relations with the other two markets, whereas there is an interactive relationship between the Indian and Chinese stock markets. In particular, the Indian stock market dominates the first moment feedback with the Chinese market, while the latter dominates the second moment feedback with the former.
    Keywords: Stock market, Cointegration, Fractionally Integrated Vector Error Correction Model, Multivariate GARCH
  10. By: Luo, Xubei; Zhu, Nong
    Abstract: Nonfarm activity plays an increasingly important role in rural household income. Based on data from the Living Standards Measurement Study in the provinces of Hebei and Liaoning, the authors study the distribution of nonfarm income in rural China. First, they assume nonfarm income as an exogenous transfer to total income to decompose the Gini index. Second, they assume nonfarm income as a potential substitute for farm income to take household choices into account and simulate household income. The results show that nonfarm activity reduces rural income inequality by raising the income of poor households to a larger extent than that of rich households. Improving rural infrastructure and implementing universal basic education are critical to build up the capacity of households (in particular, poor households) to participate in nonfarm activity. Strengthening the links between farm activity and nonfarm activity is essential to optimize the contribution of nonfarm activity to pro-poor rural economic development.
    Keywords: Rural Poverty Reduction,Poverty Monitoring & Analysis,Services & Transfers to Poor,Poverty Diagnostics,Inequality
    Date: 2006–01–01
  11. By: Blanchard, Olivier J; Giavazzi, Francesco
    Abstract: Our paper is an attempt to define the contours of the right macroeconomic strategy for China. In a nutshell, we believe that the package includes a decrease in saving, with a focus on private saving, an increase in the supply of services, in particular health services, and an appreciation of the RMB. This is why we refer to this strategy as a 'three-handed approach': action on the fiscal and budgetary front, accompanied by currency revaluation. We start by asking how the Chinese economy got to where it is - what the strategy has been since the beginning of the reforms, and what the main characteristics of the economy are today. We then ask what is the desirable path for the future, and which are the main policy tradeoffs implied by such a path. Finally, we put the various pieces together to describe what we believe is a consistent policy package.
    Keywords: China; economic development; international economics
    JEL: E2 O53
    Date: 2005–12
  12. By: Xin-Qiao (China Center of Economic Research, Peking University); Jie Bai (China Center of Economic Research, Peking University)
    Abstract: Fiscal incentive is closely related with the extra-budgetary revenues. Based on our definition of fiscal incentive, we explore the impacts of fiscal incentives under decentralization on responsiveness of public good provision to real local needs. There are also some problems in fiscal decentralization in China: first, with a huge basis of extra-budgetary revenue, the size of local government would be expanded, resulting in a heavier burden on the shoulder of local citizens and peasants; second, there exist some decreasing return to scale in local extra-budgetary expenditure; thirdly, ¡°urbanization¡± (measured as the ratio of rural population to the total population) is negatively correlated with the local extra-budgetary expenditure on urban maintenance, indicating that in China, the process of industrialization and urban construction are not consistent.
    Keywords: Fiscal Decentralization, Local Public Good Provision, Fiscal Incentives
    JEL: H61 H71 H72
    Date: 2005–06
  13. By: Wang, Youjuan; Ravallion, Martin; Chen, Shaohua
    Abstract: Concerns about incentives and targeting naturally arise when cash transfers are used to fight poverty. The authors address these concerns in the context of China ' s Di Bao program, which uses means-tested transfers to try to assure that no registered urban resident has an income below a stipulated poverty line. There is little sign in the data of poverty traps due to high benefit withdrawal rates. Targeting performance is excellent by various measures. Di Bao appears to be better targeted than any other program in the developing world. However, all but one measure of targeting performance is found to be uninformative, or even deceptive, about impacts on poverty. The authors find that the majority of the poor are not receiving help, even with a generous allowance for measurement errors. While on paper, Di Bao would eliminate urban poverty, it falls well short of that ideal in practice.
    Keywords: Services & Transfers to Poor,Poverty Monitoring & Analysis,Poverty Impact Evaluation,Inequality,Poverty Diagnostics
    Date: 2006–01–01
  14. By: Maxime Kennett; Ronald Steenblik
    Abstract: This study presents a synthesis of 17 country studies on environmental goods and services (EG&S) commissioned by the OECD, UNCTAD and the UNDP. The countries examined are Brazil, Chile, China, Cuba, the Czech Republic, the Dominican Republic, Guatemala, Honduras, Israel, Kenya, Korea, Mexico, Nicaragua, Pakistan, Panama, Thailand and Vietnam. Its aim is to identify determinants of demand for EG&S; to show common themes and experiences in the EG&S markets of different countries; and to draw attention to key trade, environment and development policy linkages. It also seeks to contribute to the exchange of expertise and experience in the area of trade and environment so that liberalisation of trade in EG&S can benefit all countries, developing and developed alike.
    Keywords: trade, developing countries, environmental goods, environmental services
    JEL: F14 F18 Q56
    Date: 2005–11–29
  15. By: Sean Dougherty; Richard Herd
    Abstract: This paper assesses the progress of China’s transition toward a market economy by examining the structure of ownership, productivity, and profitability, as well as the concentration of production across firms, industries and regions. It does this by analyzing a database of firm microdata of the quarter of a million industrial companies in operation during the 1998–2003 period. Results show that the private sector now accounts for more than half of industrial output, compared with barely more than a quarter in 1998, and operates much more efficiently than the public sector. Higher productivity has fed through to profitability, motivating greater regional specialization of production. These changes are consistent with what would be expected in a market-based economy, and suggests that reforms are making rapid progress. This Working Paper relates to the 2005 OECD Economic Survey of China ( <P>La chute rapide des barrières et la concentration croissante de l’activité économique Ce document examine les progrès réalisés par la Chine dans la transition vers une économie de marché en étudiant plus particulièrement la structure de la propriété, la productivité et la rentabilité, ainsi que la concentration de la production à l'échelle des entreprises, des secteurs d'activité et des régions. Pour cela, il analyse une base de microdonnées portant sur 250 000 entreprises industrielles qui étaient en activité au cours de la période 1998-2003. Les résultats montrent que le secteur privé représente désormais plus de la moitié de la production industrielle, contre à peine plus d'un quart en 1998, et qu'il est bien plus efficace que le secteur public. Par ailleurs, l'accroissement de la productivité et ses effets positifs sur la rentabilité de l'activité économique ont entraîné une plus grande spécialisation régionale de la production. Ces évolutions, conformes à ce que l'on peut attendre dans une économie fondée sur le jeu du marché, sont sans doute le signe que les réformes progressent rapidement. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la Chine, 2005 (
    Keywords: productivity, productivité, transition, transition, restructuring, restructuration, private sector, secteur privé, firm microdata, micro-données d'entreprise, regional concentration, concentration régionale, market economy, économie de marché
    JEL: D4 F15 L11 O12 P23
    Date: 2005–12–16
  16. By: Anders Reutersward
    Abstract: One of the key institutional outcomes of China’s economic reforms has been to create a new role for employers that is separate from the state, and allows enterprises to concentrate on their business. To protect workers, the government has set up public institutions for many social and administrative functions that until recently pertained to work units (danwei), or did not exist. This paper focuses on three such functions for which the 1994 Labour Law makes the government responsible: employment services, labour inspection and social insurance. Un des résultats institutionnels clés des réformes économiques en Chine a été la promotion du nouveau rôle joué par les employeurs, en dehors de l’Etat, qui permet aux entreprises de gérer leurs propres affaires. Le gouvernement, pour protéger les travailleurs, a créé des institutions publiques couvrant de nombreuses fonctions sociales et administratives qui, jusqu’à une date récente, ne concernaient que les unités de travail (danwei) ou n’existaient pas. Ce document se concentre sur trois des fonctions que la Loi de 1994 sur le travail place sous la responsabilité du gouvernement : les services de l’emploi, l’inspection du travail et l’assurance sociale.
    JEL: J2 J42 J52 J6 J8
    Date: 2005–11–07
  17. By: Francis E. Warnock; Veronica C. Warnock
    Abstract: Abstract: Foreign flows have an economically large and statistically significant impact on longterm interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications.
    Keywords: bond yields, Japan, China
    JEL: E43 E44 F21
    Date: 2005–12–15
  18. By: Blackman, Allen (Resources For the Future); Harrington, Winston (Resources For the Future)
    Abstract: To what extent should developing countries eschew conventional command and control environmental regulation that is increasingly seen as inefficient and rely instead on economic incentives? This paper addresses this question as it pertains to industrial air pollution. The paper discusses the advantages and disadvantages of various economic incentive instruments, presents in-depth case studies of their application in Sweden, the United States, China, and Poland, and proposes a number of policy guidelines. The authors argue that both design deficiencies and pervasive constraints on monitoring and enforcement impede the effectiveness of economic instruments in developing countries. The latter are difficult to rectify, at least in the medium term. As a result, tradable permits are generally not practical. Suitably modified however, emissions fee policies probably are appropriate. They can provide a foundation for a transition to an effective economic incentive system, and can raise much needed revenue for environmental projects and programs. In addition, if political opposition can be overcome, environmental taxes constitute a second-best but potentially effective pollution control instrument.
  19. By: Krupnick, Alan (Resources For the Future); Morgenstern, Richard (Resources For the Future); Zhang, Xuehua
    Abstract: To reduce carbon emissions worldwide, it makes sense to consider the possibility of developed countries paying for carbon reductions in developing countries. Developing countries may be interested in such activities if the ancillary air pollution benefits are large. This paper reports on an RFF survey of the emissions benefits (and costs) of reducing sulfur dioxide (SO2) emissions from small, coal-burning boilers in Taiyuan, an industrial, northern Chinese city that recently banned uncontrolled coal combustion in certain small boilers in the downtown area. We find significant carbon benefits in percentage terms - on the order of 50% to 95% reduction - associated with this SO2 control policy, with large reduction potential elsewhere in Taiyuan and China. While the cost for boilers that switched out of coal was almost $3,600 per ton of SO2 reduced, these ancillary carbon reductions are truly "free" from a social cost perspective.
    Keywords: Carbon, air pollution, informal sector, ancillary benefits, abatement costs, survey
    JEL: O12 O2 Q12 Q25 Q48

This nep-cna issue is ©2006 by Fang Zheng. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.