nep-cna New Economics Papers
on China
Issue of 2016‒09‒04
seven papers chosen by
Zheng Fang
Ohio State University

  1. The Effect of Exchange Rates on Chinese Trade: A Dual Margin Approach By Bin Qiu; Kuntal K. Das; W. Robert Reed
  2. Public Debt and Private Firm Funding: Evidence from Chinese Cities By Yi Huang; Marco Pagano; Ug Panizza; Tano Santos
  3. China’s evolving role in global production networks: the decoupling debate revisited By Prema-chandra Athukorala; John Ravenhill
  4. China’s Inequality is Important – but which Inequality? By John Knight
  5. The Visible Hand: The Role of Government in China’s Long-Awaited Industrial Revolution By Fortier, George E.; Wen, Yi
  6. Dynamics of investment negotiations between China and Japan : the China-Japan-Korea trilateral investment treaty and beyond By Hamanaka, Shintaro
  7. Does market upgrading benefit farmers? : market differentiation, contract farming, and professional cooperatives in China's pork processing industry By Watanabe, Mariko

  1. By: Bin Qiu; Kuntal K. Das (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: Previous studies investigating the effect of exchange rate changes on a country's exports have found little evidence that exchange rates matter. This “Exchange Rate Disconnect Puzzle†may stem from the fact that studies have mostly focused on aggregate data. We analyze the effect of real exchange rate fluctuations of the RMB by decomposing Chinese trade into its “extensive†and “intensive†margins using product-level data. Contrary to recent empirical evidence on the insignificant effects of exchange rate changes on trade, we estimate that real appreciation of the RMB has a significantly negative impact on Chinese exports. We also find that the major channel of effect is via the extensive margin. There is only weak evidence to indicate that imports are affected by exchange rates. With respect to exchange rate volatility, we generally find that it is negatively associated with exports, with no significant effect on imports. There appear to be major differences across China's major and non-major trading partners. Most of the exchange rate effects that we estimate are with China’s non-major trading partners.
    Keywords: Chinese Trade, Extensive Margin, Intensive Margin, Real Exchange Rate, Volatility
    JEL: F14 F31
    Date: 2016–08–22
  2. By: Yi Huang (The Graduate Institute, Geneva); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF, CEPR and ECGI); Ug Panizza (The Graduate Institute, Geneva); Tano Santos
    Abstract: In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing firms by tightening their funding constraints, while it did not affect state-owned and foreign firms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing firms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative effect on investment by private firms in industries more dependent on external funding. Finally, in cities with high government debt, firm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the firm’s likelihood of being credit-constrained. Altogether, these results suggest that, by curtailing private investment, the massive public debt issuance associated with the post-2008 fiscal stimulus sapped long-term growth prospects in China.
    Keywords: Investment, Local public debt, Crowding out, Credit constraints, China
    JEL: E22 H63 H74 L60 O16
    Date: 2016–07–30
  3. By: Prema-chandra Athukorala; John Ravenhill
    Abstract: This paper examines the implications of the evolving role of China in East-Asia centred global production networks for regional and global integration of the Chinese economy. The main focus is on the ‘decoupling’ thesis, the notion that China’s rise has been instrumental in reshaping the East-Asian region as a self-contained economic entity with potential for maintaining growth dynamism independent of the developed economies. The analysis is based on a new dataset that permits delineating the role of the other East Asian countries as suppliers of parts and components for assembly bases in China and China’s dependence on third-country markets. We find that China’s reliance on East Asian neighbours for parts and component supply has significantly declined in recent years, reflecting deepening of China’s engagement in production networks. China is also emerging as a significant supplier of parts and components within global production networks. There has been a notable geographic diversification of China’s assembly exports with a significant increase in the shares of extra-regional developing countries, but Western countries still absorb a sizeable share.
    Keywords: China, global production networks, trade patterns, decoupling thesis
    JEL: F11 F14 F23 M16
    Date: 2016
  4. By: John Knight
    Abstract: This think-piece questions the normative value in the Chinese case of standard measures of aggregate income inequality such as the Gini coefficient. Evidence is adduced that people have narrow frames of reference and that they distinguish between income inequalities that they perceive to be fair and those that they perceive to be unfair. It is suggested that value judgements about what is fair or unfair can be guided by people’s own perceptions. People’s perceptions of unfairness can also be important to a government concerned to avoid social instability. The estimation of happiness functions can help to make the relevant distinctions. Examples are given of how fair and unfair inequalities might be identified. Unfairness might be more strongly perceived and felt in inequalities of economic power than in inequalities of income, although the former can in turn result in inequalities of income. An argument is made for China researchers to extend inequality research and research instruments towards an economics of fairness and unfairness.
    Keywords: Fairness; Frames of reference; Gini coefficient; Inequality of income; Inequality of economic power; Unfairness
    JEL: D31 D63
    Date: 2016
  5. By: Fortier, George E. (Federal Reserve Bank of St. Louis); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: China is undergoing its long-awaited industrial revolution. There is no shortage of commentary and opinion on this dramatic period, but few have attempted to provide a coherent, in-depth, political economic framework that explains the fundamental mechanisms behind China’s rapid industrialization. This article reviews the New Stage Theory of economic development put forth by Wen (2016a). It illuminates the critical sequence of developmental stages since the reforms enacted by Deng Xiaoping in 1978: namely, small-scale commercialized agricultural production, proto-industrialization in the countryside, a formal industrial revolution based on mass production of labor-intensive light consumer goods, a sustainable “industrial trinity” boom in energy/motive power/infrastructure, and a second industrial revolution involving the mass production of heavy industrial goods. This developmental sequence follows essentially the same pattern as Great Britain’s Industrial Revolution, despite sharp differences in political and institutional conditions. One of the key conclusions exemplified by China’s economic rise is that the extent of industrialization is limited by the extent of the market. One of the key strategies behind the creation and nurturing of a continually growing market in China is based on this premise: The free market is a public good that is very costly for nations to create and support. Market creation requires a powerful “mercantilist” state and the correct sequence of developmental stages; China has been successfully accomplishing its industrialization through these stages, backed by measured, targeted reforms and direct participation from its central and local governments.
    Keywords: China; Income Traps; Institutions; Industrial Revolution; Economic Development; Industrial Policies; Washington Consensus; Shock Therapy; New Stage Theory
    Date: 2016–08–01
  6. By: Hamanaka, Shintaro
    Abstract: The investment agreement relationship between China and Japan is complex. The many intersecting and overlapping agreements can rightly be described as a "noodle bowl of agreements." The 1989 bilateral investment treaty (BIT) between China and Japan still stands. Japan can also free-ride on the negotiation outcome of China's BITs and free trade agreements (FTAs) with other countries by using the most-favored-nation (MFN) provision in the 1989 China-Japan BIT, which does not contain regional economic integration organization (REIO) exception rules. However, because the China-Japan BIT does not have investor-state dispute settlement (ISDS), it may face implementation problems. The China-Japan-Korea trilateral investment treaty (CJK TIT), in force since 2014, made improvements upon the 1989 BIT, but Japan is not entirely satisfied with the outcome. For Japan, pre-establishment national treatment (NT) and prohibition of various types of performance requirements are the most important negotiation items, but the CJK TIT insufficiently addressed those problems. Moreover, because the CJK TIT has MFN provisions with an REIO exception rule, better access to investment markets brought about by future FTAs such as the China-Korea FTA and the EU-China FTA cannot be imported into CJK TIT. Hence, in the long run, Japan needs to pursue an FTA investment chapter with China that covers both MFN and ISDS.
    Keywords: International agreements, Foreign investments, Bilateral investment treaty (BIT), China-Japan-Korea Trilateral Investment Treaty (CJK TIT), US-China BIT, Most-favored nation (MFN)
    JEL: F15 F53 F55
    Date: 2016–08
  7. By: Watanabe, Mariko
    Abstract: This study tested whether contract farming or farmers professional cooperatives (FPCs) improved the social benefit of pork production and income of breeding farmers in China. The main concern of this study is whether institutional arrangement like contract farming or FPCs actually improved the welfare of farmers as expected. To answer this question accurately, we estimated the differentiated market demand of pork products in order to quantify the benefit by transaction types. Our study finds that contract farming or FPCs improved the benefits of pork products, but farmer's income remained lower than that of traditional transaction types. This finding is new in terms of quantifying distribution of the economic values among sales outlets, agro-firms and farmers. It is more reliable because it explicitly captures impacts from both demand side and supply side by structural estimation. In practice, we need to keep it mind the bargaining power of small farmers will not improve instantly even when the contract farming or FPCs are introduced.
    Keywords: Agricultural industries, Agriculture, Agricultural cooperative, Farmers, Food industry, Pork processing industry, Differentiated demand estimates, Value chain, Contract farming, Farmers professional cooperatives
    JEL: L22 O13 Q13
    Date: 2016–08

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