nep-cna New Economics Papers
on China
Issue of 2016‒07‒23
fourteen papers chosen by
Zheng Fang
Ohio State University

  1. Take-off, Persistence and Sustainability: The Demographic Factor in Chinese Growth By Fang Cai and Yang Lu
  2. Understanding Recent Trends in Income Inequality in the People’s Republic of China By Zhuang, Juzhong; Li, Shi
  3. What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending By Tao Zha; Jue Ren; Kaiji Chen
  4. Firm Entry and Regional Growth Disparities: the Effect of SOEs in China By Kjetil Storesletten; Gueorgui Kambourov; Loren Brandt
  5. The Impact of Foreign Bank Presence on Foreign Direct Investment in China By Steven ONGENA; Shusen QI; Fengming QIN
  6. The effect of the New Silk Road railways on aggregate trade volumes between China and Europe By Li, Yuan; Bolton, Kierstin; Westphal, Theo
  7. Macroeconomic trade effects of vehicle currencies: Evidence from 19th century China By El-Shagi, Makram; Zhang, Lin
  8. Recasting the Iron Rice Bowl: The Reform of China's State Owned Enterprises By Daniel Berkowitz
  9. How Growth Deceleration in the People’s Republic of China Affects Other Asian Economies: An Empirical Analysis By Lee, Minsoo; Park, Donghyun; Ramayandi, Arief
  10. The China-Russia trade relationship and its impact on Europe By Alicia García-Herrero; Jianwei Xu
  11. Economic Growth in China and Its Potential Impact on Australia-China Bilateral Trade By Yu Sheng
  12. Forecasting China's Economic Growth and Inflation By Higgins, Patrick C.; Zha, Tao; Zhong, Karen
  13. Modelling and Testing Volatility Spillovers in Oil and Financial Markets for USA, UK and China By Chia-Lin Chang; Michael McAleer; Jiarong Tian
  14. The Geography of City Liveliness and Land Use Configurations: Evidence from Location-Based Big Data in Beijing By Chengyu Li; Mark Wang; Jianghao Wang; Wenjie Wu

  1. By: Fang Cai and Yang Lu
    Abstract: With the reduction of the working-age population and the increase of the population dependency ratio as the main indicators of the diminishing demographic dividend, China's potential growth rate is decreasing. Our results suggest that the demographic dividend contributed to nearly one fourth of the economic growth in China in the past three decades, while total factor productive growth explains another third and capital accumulation explaining the remaining growth (nearly half). China's potential growth rate will continue to slow—it was nearly 10 per cent during 1980–2010 but 6.65 per cent on average during 2016–2020—because of the diminishing demographic dividend, but reform measures are conductive to clearing the institutional barriers to the supply of factors and productivity, buffering the potential growth rate. The aggregate reform dividend could reach to 1–2 per cent on average during 2016–2050.
    Keywords: population, demography, China, intergenerational, economy policy
    Date: 2016–07–01
  2. By: Zhuang, Juzhong (Asian Development Bank); Li, Shi (Beijing Normal University)
    Abstract: This paper examines underlying factors that could explain the decline in income inequality in the People’s Republic of China (PRC) since 2008 and inquires whether the decline indicates that the PRC’s income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in the PRC since the mid-1980s: rising skill premium, declining share of labor income, increasing spatial inequality, and widening inequality in the distribution of wealth. It then provides evidence that the reversal of these drivers, with the exception of wealth inequality, could partly explain the decline in income inequality since 2008. The paper argues that since part of the reversal of these drivers is policy induced, it is important that the policy actions continue for income inequality to decline further. The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in the PRC, the future path of the country’s income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time.
    Keywords: income inequality; Kuznets hypothesis; the PRC economy
    JEL: D31 D63 N35
    Date: 2016–07–06
  3. By: Tao Zha (Federal Reserve Bank of Atlanta); Jue Ren (Emory University); Kaiji Chen (Emory University)
    Abstract: We argue that China's rising shadow banking was inextricably linked to potential \emph{balance-sheet} risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling \emph{risky} entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China
    Date: 2016
  4. By: Kjetil Storesletten (University of Oslo); Gueorgui Kambourov (University of Toronto); Loren Brandt (University of Toronto)
    Abstract: We study the effect of a large SOE (State-Owned Enterprises) sector on economic growth and document that localities (prefectures) in China with a large SOE sector in 1995 experienced a smaller economic growth than those with a small SOE sector in 1995. We show that one important mechanism through which the size of the SOE sector affects economic growth is the effect on firm entry in the non-SOE sector. In prefectures with a high SOE output share, non-SOE firm entry is small and the entrants have low TFP, labor productivity, and level of capital. We also infer the capital and output wedges that firms in the non-SOE and the SOE sector are facing in 1995 and 2004. We conclude that these wedges alone cannot account for the documented facts on non-SOE firm entry and that the analysis needs to incorporate a feature that would operate as a start-up cost (or an entry wedge). We build a heterogeneous firm model with endogenous entry to help understand the non-SOE entry patterns in the cross section in 1995. Then, we use the model to analyze the effect of a number of changes in the economic environment in China between 1995 and 2004.
    Date: 2016
  5. By: Steven ONGENA (University of Zurich, Swiss Finance Institute, and CEPR); Shusen QI (Tilburg University); Fengming QIN (Shandong University)
    Abstract: We analyze the impact of foreign bank presence on foreign direct investment (FDI) in China. The connection between the two could be particularly relevant for an emerging economy like China because the supply of financial services provided by banks may act as a constraining factor. Foreign bank presence may then enable and foster FDI and not simply result from it. Our estimates demonstrate that FDI across regions in China is increasing in the existing network of regional branches of foreign banks, which itself is driven (and, therefore, instrumented) by the timing of the regional phasing out of the local limits for foreign banks on local currency business. The effect of foreign bank presence on FDI is particularly strong for some specific sectors (farming, manufacturing, construction, transportation, wholesale/retail trade and real estate) if those sectors are importantly represented in the source economies.
    Keywords: Foreign direct investment, foreign bank presence, China
    JEL: G21 F21
  6. By: Li, Yuan; Bolton, Kierstin; Westphal, Theo
    Abstract: "One Belt, One Road" is an extensive and complex initiative whose potential effect and influence are still currently pending for answers. This paper addresses the following research question: What is the effect of the New Silk Road intercontinental railways on the trade between China and its trading partners in Central Asia and Europe? We focus on nine railway lines connecting Europe and China, which started operations between 2011 and 2015. The countries´ trade patterns with railway connections to China are then compared to the countries without railway connections to China. We find the intercontinental railways have a positive effect on China´s exports to its trading partners in Central Asia and Europe, especially concerning exports of manufactured goods, machinery and transport equipment, and miscellaneous manufactured articles. Moreover, the intercontinental railways have a positive effect on China´s imports of food and live animals from its trading partners.
    Keywords: One Belt,One Road,trade,transportation cost,weapons of the rich,everyday forms of policy influence
    JEL: F02 F14 R4
    Date: 2016
  7. By: El-Shagi, Makram; Zhang, Lin
    Abstract: We use the Chinese experience between 1867 and 1910 to illustrate how the volatility of vehicle currencies affects trade. Today's widespread vehicle currency is the dollar. However, the macroeconomic effects of this use of the dollar have rarely been addressed. This is partly due to identification problems caused by its international importance. China had adopted a system, where silver was used almost exclusively for trade, similar to a vehicle currency. While being important for China, the global role of silver was marginal, alleviating said identification problems. We develop a bias corrected structural VAR showing that silver price fluctuations significantly affected trade.
    Keywords: vehicle currency,China,SVAR,small sample
    JEL: C32 F14 F31 F41 N15
    Date: 2016
  8. By: Daniel Berkowitz
    Abstract: Following the enactment of reforms in the mid-1990s China'’s state owned enterprises(SOEs) became more profitable. Using theoretical insights from Azmat, Manning andVan Reenen (2012) and Karabarbounis and Neiman (2014) and econometric methodsin De Loecker and Warzynski (2012) this paper fi…nds that SOE restructuring wasnevertheless limited. This is because SOE profi…tability gains in part re‡flect that theywere under less political pressure to hire excess labor and also their cost of capital felland their capital-labor elasticity of substitution generally exceeded unity. Moreover,SOE productivity lagged foreign and private firms.
    Date: 2016–01
  9. By: Lee, Minsoo (Asian Development Bank); Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank)
    Abstract: Developing Asia has benefited greatly from the rise of the People’s Republic of China (PRC), primarily through the trade channel. The PRC and its neighbors have collectively formed a regional production network, and the PRC is becoming an increasingly important source of final demand. Two empirical methodologies are used to examine the likely economic impact of growth deceleration in the PRC on other Asian economies: (i) a single-equation approach that captures the trade channel and (ii) a global vector autoregressive model that captures the effects beyond just the trade channel. The results of both analyses confirm that deceleration in the PRC will indeed have a non-negligible negative effect on other economies, especially on East and Southeast Asia. An out-of-sample analysis to tease out the effect of slower growth in the PRC from the recent growth performance of selected Southeast Asian economies suggests that the PRC effect is contributing to the growth dynamics of this region but is not always dominant.
    Keywords: Asia; growth; People’s Republic of China; spillover; trade
    JEL: F43
    Date: 2016–05–13
  10. By: Alicia García-Herrero; Jianwei Xu
    Abstract: See also the event "China-Russia relations and their impact on Europe" held on 21 June 2016. EU countries are complementary to Russia on the Chinese market. However, Chinese exports are increasingly relevant substitutes for EU exports on the Russian market. This means that an increase in China-Russia economic cooperation should have a negative impact on European exports. The authors simulate a scenario in which trade tariffs between Russia and China are eliminated, which is found to reduce EU exports to Russia. Finally, a more granular approach to the question analyses which sectors in Europe will be more affected by the increasing economic links between China and Russia, and finds that electronic machinery, equipment and machinery, and nuclear reactors will be particularly affected. Such findings obviously show quickly China is moving up the ladder in terms of export structure and how strategically important it is for Europe to continue upgrading its industry to compete at the highest level of that ladder.
    Date: 2016–07
  11. By: Yu Sheng (Crawford School of Public Policy)
    Abstract: This paper uses the GTAP Static model to predict the potential impact of economic growth in China on bilateral trade between China and Australia in 2025, under three different scenarios representing the business-as-usual, the successful reform and the stagnation cases respectively. The results show that exports from Australia to China will continue to increase in both absolute and relative terms, irrespective of which economic growth path China takes, partly due to the strong complementary relationship of production between the two countries. The results also indicate that education service exports will become a new engine of bilateral trade in addition to agricultural and mineral products. Furthermore, comparing the results obtained from the three scenarios shows how successful reform will bring more benefits to both China and Australia in trade, which provides useful insights for policy making to facilitate bilateral economic relationship.
    JEL: E17 F17 F43
    Date: 2016–07
  12. By: Higgins, Patrick C. (Federal Reserve Bank of Atlanta); Zha, Tao (Federal Reserve Bank of Atlanta); Zhong, Karen (Shanghai Jiaotong University)
    Abstract: Although macroeconomic forecasting forms an integral part of the policymaking process, there has been a serious lack of rigorous and systematic research in the evaluation of out-of-sample model-based forecasts of China's real gross domestic product (GDP) growth and consumer price index inflation. This paper fills this research gap by providing a replicable forecasting model that beats a host of other competing models when measured by root mean square errors, especially over long-run forecast horizons. The model is shown to be capable of predicting turning points and usable for policy analysis under different scenarios. It predicts that China's future GDP growth will be of an L-shape rather than a U-shape.
    Keywords: out of sample; policy projections; scenario analysis; probability bands; density forecasts; random walk; Bayesian priors
    JEL: C53 E10 E40
    Date: 2016–07–01
  13. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, The Netherlands; Complutense University of Madrid, Spain); Jiarong Tian (National Tsing Hua University, Taiwan)
    Abstract: The primary purpose of the paper is to analyze the conditional correlations, conditional covariances, and co-volatility spillovers between international crude oil and associated financial markets. The paper investigates co-volatility spillovers (namely, the delayed effect of a returns shock in one physical or financial asset on the subsequent volatility or co-volatility in another physical or financial asset) between the oil and financial markets. The oil industry has four major regions, namely North Sea, USA, Middle East, and South-East Asia. Associated with these regions are two major financial centers, namely UK and USA. For these reasons, the data to be used are the returns on alternative crude oil markets, returns on crude oil derivatives, specifically futures, and stock index returns in UK and USA. The paper will also analyze the Chinese financial markets, where the data are more recent. The empirical analysis will be based on the diagonal BEKK model, from which the conditional covariances will be used for testing co-volatility spillovers, and policy recommendations. Based on these results, dynamic hedging strategies will be suggested to analyze market fluctuations in crude oil prices and associated financial markets.
    Keywords: Co-volatility spillovers; crude oil; financial markets; spot; futures; diagonal BEKK; optimal dynamic hedging
    JEL: C58 D53 G13 G31 O13
    Date: 2016–07–18
  14. By: Chengyu Li; Mark Wang; Jianghao Wang; Wenjie Wu
    Abstract: This paper explores the complexity in the connection between city liveliness and land use configurations for housing and consumption amenities. The sources of this complexity are captured by an integrated spatial and temporal non-stationary modelling approach that uses local linear methods to estimate heterogeneous dynamics of the spatial-temporal process. City liveliness is measured by aggregated space-time human activity intensities using mobile phone positioning data from Beijing. We find that the land use configurations for housing amenities contribute little to city liveliness, whereas consumption amenities play a significant role in attracting human activity intensities. However, such effects vary substantially over space and during a 24-hour life span. These results provide the estimates of the changes in hourly human activity distribution that would influence the form of social engagement, development patterns, and public investment policy.
    Keywords: big data, GTWR, local linear estimator, city liveliness, land use, China
    JEL: C14 P25
    Date: 2016–07

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