nep-cna New Economics Papers
on China
Issue of 2018‒04‒30
sixteen papers chosen by
Zheng Fang
Ohio State University

  1. Decoupling of Emissions and GDP: Evidence from Aggregate and Provincial Chinese Data By Gail Cohen; João Tovar Jalles; Prakash Loungani; Ricardo Marto; Gewei Wang
  2. Structural Change and Aggregate Employment Fluctuations in China and the US By Wen Yao; Xiaodong Zhu
  3. The impact of China’s electricity deregulation on coal and power industries: Two-stage game modeling approach By HuiHui Liu; ZhongXiang Zhang; ZhanMing Chen; DeSheng Dou
  4. Corporate Foreign Bond Issuance and Interfirm Loans in China By Yi Huang; Ugo Panizza; Richard Portes
  5. Social Interactions and Stigmatized Behavior: "Donating" Blood Plasma in Rural China By Chen, Xi; Sahn, David E.; Zhang, Xiaobo
  6. The Rise of Patient Capital: The Political Economy of Chinese Global Finance By Stephen B. Kaplan
  7. Evaluation of the sophistication of Chinese industries using the information-geometric decomposition approach By Takanori Minamikawa
  8. Intergovernmental Fiscal Reform in China By Philippe Wingender
  9. The impact of margin trading on share price evolution: A cascading failure model investigation By Ya-Chun Gao; Huai-Lin Tang; Shi-Min Cai; Jing-Jing Gao; H. Eugene Stanley
  10. With Their Back to the Future: Will Past Earnings Trigger the Next Crisis? By Nitzan, Jonathan; Bichler, Shimshon
  11. How Do Households Adjust to Trade Liberalization? Evidence from China's WTO Accession By Dai, Mi; Huang, Wei; Zhang, Yifan
  12. Stabilizing China’s Housing Market By Richard Koss; Xinrui Shi
  13. Impacts of shifting China¡¯s final energy consumption to electricity on CO2 emission reduction By Weigang Zhao; Yunfei Cao; Bo Miao; Ke Wang; Yi-Ming Wei
  14. Escaping the Middle-Income Trap: A Cross-Country Analysis on the Patterns of Industrial Upgrading By Wang, Lili; Wen, Yi
  15. The demand for global and local environmental protection: Experimental evidence from climate change mitigation in Beijing By Loeschel, Andreas; Pei, Jiansuo; Sturm, Bodo; Wang, Ran; Buchholz, Wolfgang; Zhao, Zhongxiu
  16. Leniency, Asymmetric Punishment and Corruption: Evidence from China By Maria Perrotta Berlin; Bei Qin; Giancarlo Spagnolo

  1. By: Gail Cohen; João Tovar Jalles; Prakash Loungani; Ricardo Marto; Gewei Wang
    Abstract: We provide a comprehensive analysis of the relationship between greenhouse gas (GHG) emissions and GDP in China using both aggregate and provincial data. The Kuznets elasticity is about 0.6 for China, higher than that in advanced countries but below that of major emerging markets. The elasticity is somewhat lower for consumption-based emissions than for production-based emissions, providing mild evidence consistent with the “pollution haven” hypothesis. The Kuznets elasticity is much lower for the last three decades than for the three previous decades, suggesting a longer-term trend toward decoupling as China has become richer. Further evidence of this comes from provincial data: richer provinces tend to have smaller Kuznets elasticities than poorer ones. In addition to the trend relationship, we find that the Environmental Okun's Law holds in China.
    Date: 2018–04–11
  2. By: Wen Yao; Xiaodong Zhu
    Abstract: The correlation between the cyclical components of aggregate employment and GDP is highly positive in the US, but close to zero in China. We argue that the difference in the size of the agricultural sector is the reason for the difference in employment-output correlation. We construct a simple two-sector growth model with productivity shocks and non-homothetic preferences and show that the model can simultaneously account for the long-run structural change and short-run employment fluctuations at sector level and in the aggregate for both economies.
    Keywords: Structural Change, Non-homothetic Preferences, Labor Reallocation, Aggregate Fluctuations
    JEL: E24 E32 O41
    Date: 2018–04–14
  3. By: HuiHui Liu (Academy of Chinese Energy Strategy, China University of Petroleum, Beijing); ZhongXiang Zhang (Ma Yinchu School of Economics and China Academy of Energy, Environmental and Industrial Economics, Tianjin University, Tianjin); ZhanMing Chen (Department of Energy Economics, School of Economics, Renmin University of China, Beijing); DeSheng Dou (Academy of Chinese Energy Strategy, China University of Petroleum, Beijing)
    Abstract: The regulated price mechanism in China’s power industry has attracted much criticism because of its incapability to optimize the allocation of resources. To build an “open, orderly, competitive and complete” power market system, the Chinese government launched an unprecedented marketization reform in 2015 to deregulate the electricity price. This paper examines the impact of the electricity price deregulation in the industry level. We first construct two-stage dynamic game models by taking the coal and coal-fired power industries as the players. Using the models, we compare analytically the equilibriums with and without electricity regulation, and examine the changes in electricity price, electricity generation, coal price and coal traded quantity. The theoretical analyses show that there are three intervals of the regulated electricity sales prices which influence the impact of electricity price deregulation. Next, we collect empirical data to estimate the parameters in the game models, and simulate the influence of electricity deregulation on the two industries in terms of market outcome and industrial profitability. Our results suggest that the actual regulated electricity price falls within the medium interval of the theoretical results, which means the price deregulation will result in higher electricity sales price but lower coal price, less coal traded amount and less electricity generation amount. The robustness analysis shows that our results hold with respect to the electricity generation efficiency and price elasticity of electricity demand.
    Keywords: China, electricity deregulation, reform, coal industry, power industry
    JEL: Q41 Q43 Q48 L94 L98
    Date: 2018–04
  4. By: Yi Huang; Ugo Panizza; Richard Portes
    Abstract: This paper uses firm-level data to document and analyze international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky firms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.
    JEL: F32 F34 G15 G30
    Date: 2018–04
  5. By: Chen, Xi (Yale University); Sahn, David E. (Cornell University); Zhang, Xiaobo (Peking University)
    Abstract: Despite the resultant disutility, some people, in particular, the poor, are engaged in behaviors that carry social stigma. Empirical studies on stigmatized behavior are rare, largely due to the formidable challenges of collecting data on stigmatized goods and services. In this paper, we add to this limited empirical evidence by examining the behavior of "donating" blood plasma in exchange for cash rewards in China. We do so using two primary data sets: the first is a three-wave, census‐type household survey that enables us to examine the evolving patterns and determinants of "donating" plasma. The second is data on detailed gift exchange records of all households. The data allow us to define reference groups, measure the intensity of social interactions, and identify peer effects using a novel network structure‐based instrumental variable strategy. We find that peer effects influence decisions to "donate" plasma. For example, a one‐standard‐deviation increase in income from "donating" plasma in the peer group increases the value of own plasma "donation" by 0.15 standard deviations. Families with sons have more incentives to "donate" plasma to offset the escalated costs of getting their sons married in a tight marriage market that favors girls.
    Keywords: social stigma, social networks, peer influence, plasma "donation", China
    JEL: O1 Z1 R2 D8
    Date: 2018–03
  6. By: Stephen B. Kaplan (George Washington University)
    Abstract: As the United States has retreated from its lead role in globalization – first because of the 2008 financial crisis, and now under President Donald Trump’s leadership – China has become a major global financial player. China, as the world’s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence. What are the implications? I contend that China’s state-led capitalism is an important form of patient capital, characterized by a longerterm horizon. While technically classified as mobile capital, its higher risk tolerance and geopolitical shrewdness make state-owned capital less likely to swiftly exit debtor countries. Compared to traditional mobile capital, debtor governments thus gain more policy freedom, particularly during hard times when Western creditors might otherwise impose austerity and other onerous policy conditions. Employing an originally constructed dataset, the China Global Financial Index, I conduct an econometric test across 15 Latin American countries from 1990-2015. I find that Chinese state-to-state lending reduces governments’ reliance on conditionality-linked Western financing, giving them more autonomy to use budget deficits to intervene in their economies. This effect is also contingent on partisanship, with extreme, or populist left governments being most likely to enhance their budgetary discretion. These results suggest that Chinese financing could be a development opportunity, but only if governments invest wisely. Otherwise, by lending without policy conditions, China may be encouraging developing country governments to spend without bounds, sowing the seeds for future debt problems.
  7. By: Takanori Minamikawa (Economic Research Institute for Northeast Asia (ERINA))
    Abstract: Since the Open Door Policy was implemented in 1978, China economy has maintained a high economic growth. During this period, although the reform of state-owned enterprises and the introduction of foreign direct investments might cause the change of the industrial structure, the common recognition, about how those factor has changed Chinese industrial structure, has not been obtained. This paper applied information geometric decomposition to Input-Output tables of China in the period 1981 to 2010, and extracted the factors of the technological changes in the whole industry in China. This paper examines the different of evaluation of industrial structure between input coefficient index and information geometry approach. Furthermore based on the factors, two industrial sophistication indicators, which are about degree of Mechanization and degree of ICT introducing, respectively are constructed. The empirical results suggests that the degree of mechanization and included ICT has different characteristics for each other. Regarding mechanization, the mechanized manufacturing sectors showed increases in sophistication in the 1980s and 2000s; however, mechanized tertiary sectors showed increases in sophistication in the 1990s. Regarding ICT input, while manufacturing sectors showed a high level of sophistication in ICT input in the 2000s, tertiary sectors showed a high level of sophistication in ICT input in the 1990s.
    Keywords: Input-Output tables, Industrial structure, RAS method, Foreign Direct Investment, Innovation
  8. By: Philippe Wingender
    Abstract: China is the most decentralized country in the world in terms of expenditures shares, with subnational governments responsible for 85 percent of government spending. Limited revenue autonomy and insufficient intergovernmental transfers have led to large unfunded mandates and a build-up of debt outside the budget. The government has recently announced an ambitious intergovernmental fiscal reform, which will increase the role of the central government. Comprehensive reform is needed to improve public service delivery, increase overall social spending levels and reduce regional disparities. Revenue reforms are also necessary to improve efficiency and reduce vulnerabilities from excessive subnational borrowing. These reforms are challenging, but are crucial so that the government can support China’s continued development and prosperity.
    Date: 2018–04–13
  9. By: Ya-Chun Gao; Huai-Lin Tang; Shi-Min Cai; Jing-Jing Gao; H. Eugene Stanley
    Abstract: Margin trading in which investors purchase shares with money borrowed from brokers is blamed to be a major cause of the 2015 Chinese stock market crash. We propose a cascading failure model and examine how an increase in margin trading increases share price vulnerability. The model is based on a bipartite graph of investors and shares that includes four margin trading factors, (i) initial margin $k$, (ii) minimum maintenance $r$, (iii) volatility $v$, and (iv) diversity $s$. We use our model to simulate margin trading and observe how the share prices are affected by these four factors. The experimental results indicate that a stock market can be either vulnerable or stable. A stock market is vulnerable when an external shock can cause a cascading failure of its share prices. It is stable when its share prices are resilient to external shocks. Furthermore, we investigate how the cascading failure of share price is affected by these four factors, and find that by increasing $v$ and $r$ or decreasing $k$ we increase the probability that the stock market will experience a phase transition from stable to vulnerable. It is also found that increasing $s$ decreases resilience and increases systematic risk. These findings could be useful to regulators supervising margin trading activities.
    Date: 2018–04
  10. By: Nitzan, Jonathan; Bichler, Shimshon
    Abstract: The U.S. stock market is again in turmoil. After a two-year bull run in which share prices soared by nearly 50 per cent, the market is suddenly dropping. Since the beginning of 2018, it lost nearly 10 per cent of its value, threatening investors with an official ‘correction’ or worse. As always, there is no shortage of explanations. Politically inclined analysts emphasize Trump’s recently announced trade wars, sprawling scandals and threatening investigations, as well as the broader turn toward ‘populism’; interest-rate forecasters point to central-bank tightening and china’s negative credit impulse; quants speak of breached support lines and death crosses; bottom-up analysts highlight the negative implications of the Face-book/Cambridge Analytica debacle for the ‘free-data’ business model; and top-down fundamentalists indicate that, at near-record valuations, the stock market is a giant bubble ready to be punctured. And on the face of it, these explanations all ring true. They articulate various threats to future profits, interest rates and risk perceptions, and since equity prices discount expected risk-adjusted future earnings, these threats imply lower prices. But there is one little problem. Unlike their pundits, capitalists nowadays tend to look not forward, but backward: instead of matching asset prices to the distant future, they fit them to the immediate past.
    Keywords: asset pricing,capitalization,capitalized power,major bear markets,stock market,systemic fear
    JEL: P16 G01
    Date: 2018
  11. By: Dai, Mi (Beijing Normal University); Huang, Wei (National University of Singapore); Zhang, Yifan (Chinese University of Hong Kong)
    Abstract: We investigate the impacts of trade liberalization on household behaviors and outcomes in urban China, exploiting regional variation in the exposure to tariff cuts resulting from WTO entry. Regions that initially specialized in industries facing larger tariff cuts experienced relative declines in wages. Households responded to this income shock in several ways. First, household members worked more, especially in the non-tradable sector. Second, more young adults co-resided with their parents, and thus household size increased. Third, households saved less. These behaviors significantly buffered the negative wage shock induced by trade liberalization.
    Keywords: household adjustments, trade liberalization, WTO
    JEL: F14 F16 J20 R23
    Date: 2018–03
  12. By: Richard Koss; Xinrui Shi
    Abstract: The sharp rise of house prices in China’s Tier-1 cities has fostered a great deal of commentary about the possibility of bubbles forming there. However, China’s unique housing market characteristics make it difficult to assess the macroeconomic severity of bursting bubbles, even if they exist. These include the setting of land supply and prices by the government, among many others. The presence of overbuilt “ghost cities” greatly complicates the ability of traditional macroeconomic policies to address these concerns. This paper looks at proposals to shore up the mortgage underwriting and legal infrastructure to help China withstand the impact of falling prices, should this occur.
    Date: 2018–04–13
  13. By: Weigang Zhao; Yunfei Cao; Bo Miao; Ke Wang; Yi-Ming Wei
    Abstract: Electrification is advocated by both academics and the Chinese government to control air pollution and promote productivity. However, the problem remains to be solved of how to achieve the trade-off between reducing CO2 emissions and maintaining economic growth when switching from various fuels to electricity under the policy support. In view of this, after analyzing the effects of exogenous shocks in various fuel demands based on impulse response functions of several vector autoregression models, this paper measures the current and long-term impacts of electrification on GDP and CO2 emissions. Finally, some typical cases of replacement of fossil-fueled appliances by electrical counterparts encouraged by the government are assessed. The main findings are: (1) Almost all of the exogenous shocks in fuel demands have positive effects on both GDP and CO2 emissions, while the gas shock has a slightly negative effect on GDP; (2) Carbon intensity decreases and even CO2 emission reductions with increased GDP are potentially achieved, in both current and permanent periods, for coal-electricity and oil-electricity switching, while gas-electricity switching is not a wise choice in view of CO2 emission reduction in the long run; (3) The alternative electric appliances for electrification have very different impacts on CO2 emission reduction.
    Keywords: Fuel-switching; Inter-fuel substitution; Electrification; CO2 emissions; Economic growth
    JEL: Q54 Q40
    Date: 2018–04–10
  14. By: Wang, Lili; Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: With rapid industrial upgrading along the global value chain of manufactured goods, China has transformed, within one generation, from an impoverished agrarian society to a middle-income nation as well as the largest manufacturing powerhouse in the world. This article identifies the pattern of China’s industrial upgrading and compares it with those of other successfully industrialized economies and the failed ones. We find that (i) China (since 1978) followed essentially the same path of industrial upgrading as that of Japan and the “Asian Tigers.” These economies succeeded in catching up with the developed western world by going through three developmental stages sequentially; namely, a proto-industrialization in the rural areas, a first industrial revolution featuring mass production of labor-intensive light consumer goods, and then a second industrial revolution featuring mass production of the means of mass production (i.e., capital-intensive heavy industrial good s such as steel, machine tools, electronics, automobiles, communication and transport infrastructures). (ii) In contrast, economies stuck in the low-income trap or middle-income trap did not follow the above sequential stages of industrialization. For example, many Eastern European and Latin American countries after WWII jumped to the stage of heavy industrialization without fully developing their labor-intensive light industries, and thus stagnated in the middle-income trap. Also, there is a clear lack of proto-industrialization in the rural areas for many African economies that have remained in the low-income trap. We believe that laissez-faire and “free market” alone is unable to trigger industrial upgrading. Instead, correct government-led bottom-up industrial policies are the key to escaping the low- and middle-income traps.
    Keywords: China’s Economic Development; Industrial Revolution; Middle-Income Trap; New Institutional Theory; New Stage Theory; New Structural Economics
    JEL: F02 N10 O11 O40
    Date: 2018–01–16
  15. By: Loeschel, Andreas; Pei, Jiansuo; Sturm, Bodo; Wang, Ran; Buchholz, Wolfgang; Zhao, Zhongxiu
    Abstract: In this study, the real demand for global and local environmental protection in Beijing, China, is elicited and investigated. Participants from Beijing were offered the opportunity to contribute to voluntary climate change mitigation by purchasing permits from two Chinese CO2 emissions trading schemes (ETS). Purchased permits were withdrawn from the ETS. Since CO2 emissions mitigation is inevitably linked to other local benefits like the reduction in emissions of air pollutants, the aim of our study is to establish the demand for local and global environmental protection. To this end, Beijing and Shenzhen ETS permits were offered. The result is that at low prices the demand for Beijing ETS permits is significantly higher than for Shenzhen ETS permits indicating that a substantial part of the revealed demand for voluntary climate change mitigation in Beijing is driven by concerns for local co-benefits of CO2 emissions reduction. Our research identifies the important role of private benefits in the voluntary provision of the global public good climate change mitigation and provides first experimental evidence for China.
    Date: 2018
  16. By: Maria Perrotta Berlin (SITE); Bei Qin (University of Hong Kong); Giancarlo Spagnolo (SITE-Stockholm School of Economics, EIEF, Tor Vergata & CEPR)
    Abstract: Fostering whistleblowing through leniency and asymmetric sanctions is regarded as a potentially powerful anti-corruption strategy in the light of its success in busting cartels. The US Department of Justice started a pilot program of this kind in 2016. It has been argued, however, that introduced in China in 1997, these policies did not help against corruption. We map the evolution of the Chinese anti-corruption legislation and aggregate enforcement data, documenting a large and stable fall in prosecuted cases after the 1997 reform. The fall is consistent with reduced corruption detection, but under specific assumptions also with improved deterrence. To resolve the ambiguity, we collect and analyze a random sample of case files from corruption trials. Results point indeed at a negative effect of the 1997 reform on corruption detection and deterrence, but plausibly linked to its poor design: contrary to what theory prescribes, it increased leniency also for bribe-taking bureaucrats that cooperate after being denounced, enhancing their ability to retaliate against whistleblowing bribe-givers.
    Date: 2018–04–23

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