nep-cna New Economics Papers
on China
Issue of 2019‒10‒14
eighteen papers chosen by
Zheng Fang
Ohio State University

  1. The One-Child Policy and Chinese Saving Behavior By Zhongchen Song; Tom Coupé; W. Robert Reed
  2. China, Like the US, Faces Challenges in Achieving Inclusive Growth Through Manufacturing By Robert Z. Lawrence
  3. Chinese Investments in the US and EU Are Declining—for Similar Reasons By Jacob Funk Kirkegaard
  4. The Chinese Real Estate Bubble By Smith, Gary; Liang, Wesley
  5. International Talent Inflow and R&D Investment: Firm-level Evidence from China By Hao Wei; Ran Yuan; Laixun Zhao
  6. The Labor Market Effects of the China Syndrome: Evidence from South Korean Manufacturing By Jaerim Choi; Mingzhi Xu
  7. High-Skilled Services and Development in China By Berthold Herrendorf; Lei Fang
  8. Extreme Weather and Long-term Health: Evidence from Two Millennia of Chinese Elites By Wang-Sheng Lee; Ben G. Li
  9. Tariffs, Vertical Oligopoly and Market Structure: Empirical Investigation By ARA Tomohiro; ZHANG Hongyong
  10. Winners and losers from China’s ascension in international trade: a structural approach By Costa, Francisco Junqueira Moreira da; Pessoa, João Paulo
  11. Dancing with dragons: Chinese import penetration and the performances of manufacturing firms in South Africa By Torreggiani Sofia; Andreoni Antonio
  12. The Consumption Response to Trade Shocks: Evidence from the US-China Trade War By Michael E. Waugh
  13. The Effect of Public Investment on Private Investment: Theory and Evidence on the Local Market Competition Channel By Sophia Chen; Yu Shi
  14. Evaluating the Performance of Factor Pricing Models for Different Stock Market Trends: Evidence from China By Yu Wang; Haicheng Shu
  15. The U.S.-China trade war: Tariff data and general equilibrium analysis By Minghao Li; Edward J. Balistreri; Wendong Zhang
  16. Effects of R&D subsidies on regional economic dynamics: Evidence from Chinese provinces By Eberle, Jonathan; Böing, Philipp
  17. Income and consumption inequality in China: A comparative approach with India By Gradín Carlos; Wu Binbin
  18. Business Liquidity, Consumer Liquidity, and Monetary Policy By Chao He; Min Zhang

  1. By: Zhongchen Song; Tom Coupé (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: Researchers have long puzzled over China’s high saving rate. Some have hypothesized that the explanation lies with China’s One-Child Policy (OCP). According to this hypothesis, faced with fewer children to support them in their old age, Chinese parents increased their saving to finance retirement. Previous research relied on empirical studies of the relationship between children and saving behavior. However, all of these studies based their analysis on data after the OCP was implemented. Their implicit counterfactual for China without an OCP was households with multiple children living in an OCP environment. In contrast, we compare Chinese people with people from regions that do not have restrictive population policies (Taiwan, Hong Kong, Singapore, Malaysia, Japan, and South Korea). These regions share many cultural and demographic characteristics with China that suggest they can be used as a counterfactual for China. This approach also enables us to employ a Blinder-Oaxaca decomposition procedure to identify the different channels by which children could affect savings. Our main finding is that there is little difference in the saving behavior of Chinese people with their regional counterfactuals. This is evidence against the hypothesis that the OCP was a major contributor to China’s high saving rate. It also suggests that the recent relaxation of the OCP cannot be counted upon to boost Chinese consumption.
    Keywords: China, One-Child Policy, Saving rate, Demographics, Blinder-Oaxaca decomposition
    JEL: D14 E21 J13 J18 O10
    Date: 2019–10–01
  2. By: Robert Z. Lawrence (Peterson Institute for International Economics)
    Abstract: For more than three decades the goal of becoming “the factory of the world†has been at the core of China’s development strategy. This strategy, in combination with high rates of domestic investment and low rates of consumption, made Chinese production the most manufacturing intensive in the world. But as its wages have risen, China’s competitiveness in the most labor-intensive manufacturing industries has eroded. Its ability to assemble products remains a major source of its exports, but it has also tried to shift toward more sophisticated value-added production domestically. Chinese domestic spending has shifted away from investment toward more consumption as citizens’ incomes have grown. Like Americans, Chinese people are also spending more on services than on manufactured goods. All these changes are fundamentally altering the structure of China’s production, reducing the role of manufacturing, and increasing the skill levels of workers in manufacturing. This Policy Brief reviews the challenges posed by these developments for China’s long-term goal of achieving more inclusive growth. It presents evidence that commonly held perceptions that Chinese manufacturing employment growth is robust are wrong. In fact, such growth has peaked and China is now following the pattern of structural change that is typical of a more mature emerging economy, in which the share of employment in manufacturing declines as workers are increasingly employed in services.
    Date: 2019–08
  3. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: For years China has been one of the world’s most rapidly growing sources of outward foreign direct investment. Since peaking in 2016, however, Chinese outward investments, primarily to the United States but also the European Union, have declined dramatically, especially in response to changes in China’s domestic rules on capital outflows and in the face of rising nationalism in the United States. Concerns about growing Chinese influence in other economies, the ascendant role of an authoritarian government in Beijing, and the possible security implications of Chinese dominance in the high-technology sector have put Chinese outward investments under intense international scrutiny. This Policy Brief analyzes the most recent trends in Chinese investments in the United States and the European Union and reviews recent political and regulatory changes both have adopted toward Chinese inward investments. It also explores the emerging transatlantic difference in the regulatory response to the Chinese information technology firm Huawei. Concerned about national security and as part of the ongoing broader trade friction with China, the United States has cracked down far harder on the company than the European Union.
    Date: 2019–09
  4. By: Smith, Gary (Pomona College); Liang, Wesley (Pomona College)
    Abstract: China has seen extraordinary economic growth for the past two decades, coupled with a booming housing market. Following the 2008 financial crisis, however, observers began worrying that the Chinese real estate market had been gripped by a speculative bubble. We use residential rent and price data to assess whether these fears are justified. We conclude that residential real estate markets are bubbly in Beijing and Shanghai, with the Beijing housing market frothier than the Shanghai market.
    Keywords: China real estate, housing bubble
    Date: 2019–01–01
  5. By: Hao Wei (Department of International Economics, Beijing Normal University); Ran Yuan (Department of International Economics, Beijing Normal University); Laixun Zhao (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: Using firm-level R&D data with regional international talent data, we find that international talent increases the R&D investment of Chinese manufacturing firms, a result that is further confirmed with patent data and under a number of robustness checks. These findings stem from two mechanisms: international talent boosts human capital accumulation and provides a diversified labor force. Further, the R&D promoting effect is stronger if firms are located in eastern China rather than in other regions, of small and medium-sized rather than large-sized, of domestic ownership rather than foreign ownership. The policy implication is, the introduction of international talent can be a new way to promoting R&D investment, especially for skilled-labor constrained countries.
    Keywords: International talent inflow, Manufacturing firms, R&D, Patent application
    JEL: F16 F22 O32
    Date: 2019–09
  6. By: Jaerim Choi (University of Hawaii at Manoa); Mingzhi Xu (University of Hawaii at Manoa)
    Abstract: We evaluate the direct impact of China trade shock on the Korean labor market following the approach of Acemoglu et al. (2016). Using firm- and industry-level data for the period 1993–2013, our direct estimates imply that the net employment effect of the China shock in the manufacturing sector is the creation of 0.52 million jobs. The positive impact is mostly driven by China’s rising demand for intermediate inputs and capital goods from Korea to support its export expansion to the global economy. The import-competition channel plays a negligible role in manufacturing employment because it creates temporary jobs that merely compensate for the loss in permanent jobs. By contrast, over the same period, the average wage declined by 2.4 percent, and income inequality, measured as the gap between the high- and low-income quantile, grew substantially in manufacturing. In addition, we find that the direct effect of China shock lowers labor market concentration by shifting workers from big firms to small and medium-sized firms.
    Keywords: China Trade Shock, Labor Adjustment, Income Inequality, Temporary Jobs, Labor Market Concentration
    JEL: F14 F16 J23 J31 L60
    Date: 2019–08
  7. By: Berthold Herrendorf (Arizona State University); Lei Fang (Federal Reserve Bank of Atlanta)
    Abstract: We document that the employment share of high-skilled services is much lower in China than in countries with similar GDP per capita. We build a model of structural change between goods, low-skilled services, and high-skilled services to account for this observation. We find that large distortions limit the size of high-skilled services in China. If they were removed, both high-skilled services and GDP per capita would increase considerably and the effects of technological progress and education on GDP per capita would be considerably larger. This suggests that distortions in high-skilled services importantly hold back the development of China.
    Date: 2019
  8. By: Wang-Sheng Lee; Ben G. Li
    Abstract: Modern technology empowers human beings to cope with various extreme weather events. Using Chinese historical data, we examine the impact of extreme weather on long-term human health in an environment where individuals have no access to modern technology. By combining life course data on 5,000 Chinese elites with historical weather data over the period 1-1840 AD, we find a significant and robust negative impact of droughts in childhood on the longevity of elites. Quantitatively, encountering three years of droughts in childhood reduces an elite's life span by about two years. A remarkably important channel of the childhood drought effect is the deterioration of economic conditions caused by droughts.
    Keywords: Longevity, Weather, Early-life conditions, Elites, History of China
    JEL: I15 N35
    Date: 2019–09
  9. By: ARA Tomohiro; ZHANG Hongyong
    Abstract: We study the impact of tariffs on the margins of intermediate-input trade and examine their impact on optimal tariffs for intermediate inputs. Using China Customs disaggregate product-level data from 2000 to 2008, we find that (i) China's WTO accession and the resulting input import tariff reductions increase China's input imports through both the extensive and intensive margins; (ii) after China's WTO accession, China's input import tariffs are higher, the more concentrated and hence the less competitive China's input markets (at the product level). We confirm that these findings are robust in alternative specifications. The estimation results are consistent with the theoretical prediction of the endogenous market structure by Ara and Ghosh (2017).
    Date: 2019–08
  10. By: Costa, Francisco Junqueira Moreira da; Pessoa, João Paulo
    Abstract: This paper employs a unified theoretical framework to estimate the effect ofchanges within China on the Brazilian and World’s economy. Based on the Ricar-dian model of trade of Costinotet al.(2012), we perform counterfactuals exercises toanalyze how industries in Brazil would have performed in the absence of the Chineseascension. We discuss two main counterfactual exercises. First, we model produc-tivity growth in China as the main lever by which Chinese supply and demandconditions evolve and affect economies worldwide. Second, we study how changesin composition of Chinese demand (taste) affects trade flows around the world. Thetwo counterfactual exercises together suggest that changes in China’s comparativeadvantage hampered manufacturing sectors abroad, in particular labor-intensiveBrazilian manufacture producers. We find no support for the idea of a China tasteshock driving demand towards raw materials. Our model suggests that if Chinatriggered a commodity boom in the world, or at least in Brazil, this was drivenmostly by increased income in China. And any changes in China’s tastes over prod-ucts contributed to moderate such boom. Specifically, our model indicates that theboom of soybeans cultivation in Brazil is due to changes in Brazilian comparativeadvantage paired with a level increase in demand for this product within China.
    Date: 2019–09–30
  11. By: Torreggiani Sofia; Andreoni Antonio
    Abstract: Using firm-level tax administrative data from 2010 to 2017, we study the impact of Chinese import penetration on the performances of manufacturing firms in South Africa, and whether firms investing in capabilities development are more resilient to such competitive pressure. Specifically, by instrumenting Chinese import penetration with China’s share in other low- and middle-income countries’ imports, we first explore whether Chinese import exposure— both direct (e.g. affecting the sector in which the firm itself operates) and indirect (e.g. through input–output linkages along the domestic value chain)—have been associated with firms downsizing in terms of decreasing employment and sales growth and higher probability of exiting the market. Second, we examine whether firms investing in process and product innovation and skills development perform better in response to import competition. Our results indicate that rising Chinese import exposure—not only direct, but also in downstream segments of the domestic value chain—leads to slower sales and employment growth for the entire sample of surviving firms and to higher probability of shutdown for firms not undertaking any spending in capabilities development. However, we also find that the negative impact of Chinese import penetration is partially mitigated by investments in capital, innovation, and skills development.
    Keywords: Capabilities,Import,Import competition,Manufacturing
    Date: 2019
  12. By: Michael E. Waugh
    Abstract: This paper provides evidence on the consumption effects of trade shocks by exploiting changes in US and Chinese trade policy between 2017 and 2018. The analysis uses a unique data set with the universe of new auto sales at the US county level, at a monthly frequency, and a simple difference-in-difference approach to measure the effect of changes in trade policy on county-level consumption. As a lower bound, I estimate the elasticity of consumption growth to Chinese retaliatory tariffs to be around –1. This implies that counties in the upper quartile of the retaliatory-tariff distribution experienced a 3.8 percentage point decline in consumption growth. I further show that the consumption response corresponds with a decline in employment growth. These results suggest that Chinese retaliation is leading to concentrated welfare losses in the US.
    JEL: A0 E0 E21 E65 F0 F13 F4
    Date: 2019–10
  13. By: Sophia Chen (International Monetary Fund); Yu Shi (International Monetary Fund)
    Abstract: We develop a model of imperfect competition with variable markups to analyze the role of market competition in the transmission of targeted fiscal stimulus. We find that the more competitive the market is, the more sectoral output responds to fiscal stimulus in the targeted sector. The more competitive the market is, the less sectoral prices, sector-specific factor prices, and markup respond. We offer new empirical evidence consistent with these theoretical predictions in the context of the large fiscal stimulus in China in 2009-2010. Overall, our results support the view that market competition facilitates the transmission of fiscal stimulus.
    Date: 2019
  14. By: Yu Wang (Xiamen University); Haicheng Shu (Southwestern University of Finance and Economics)
    Date: 2019–10–10
  15. By: Minghao Li; Edward J. Balistreri (Center for Agricultural and Rural Development (CARD)); Wendong Zhang (Center for Agricultural and Rural Development (CARD))
    Abstract: The current trade war between the United States and China is unprecedented in modern history. This study introduces a database of tariff increases resulting from the recent trade war and quantifies the impacts using the canonical GTAPinGAMS model calibrated to the recently released GTAP version 10 accounts. We find that the tariff increases as of September 2019 decrease welfare in China by 1.9% and welfare in the U.S. by 0.3%. Impacts on sectoral revenue are reported for both countries. China’s exports to and imports from the United States are reduced by 58.3% and 50.7%. Most of the reductions in bilateral trade are absorbed by trade diversion to other countries. The welfare and U.S.-China bilateral trade impacts are exacerbated by additional tariffs threatened by the United States and corresponding retaliations from China. Sensitivity analysis is conducted by increasing and decreasing import substitution (Armington) elasticities by two standard deviations. This has modest impacts on welfare and trade flow results.
    Date: 2019–10
  16. By: Eberle, Jonathan; Böing, Philipp
    Abstract: We investigate the impact of research and development (R&D) subsidies on R&D inputs of large- and medium-sized firms and on additional innovation and economic activities in Chinese provinces. A panel vector autoregressive (VAR) model and corresponding impulse response function (IRF) analysis allow us to differentiate between direct and indirect effects, which add up to total effects. We find that an increase of R&D subsidies significantly decreases private R&D investments, although there is a significant positive effect on the R&D personnel employed in firms. We interpret these findings as a partial crowding-out effect because public funds substitute some private funds while total R&D inputs still increase. Complementarily, we find a positive secondary effect on the provincial patent activity, our measure of technological progress. Interestingly, we also find potentially unintended effects of R&D subsidies on increases in the investment rate in physical capital and residential buildings. Although R&D subsidies fail to incentivise private R&D expenditures, firms increase total R&D inputs, and provincial economies benefit from secondary effects on technological progress and capital deepening.
    Keywords: China,R&D subsidies,regional economic development,panel VAR,impulse response function
    JEL: C33 R11 R58 O38 O47
    Date: 2019
  17. By: Gradín Carlos; Wu Binbin
    Abstract: We analyse income and expenditure distribution in China in a comparative perspective with India. These countries represent extreme cases in the relationship of inequality to both wellbeing indicators. Income is more highly concentrated than expenditure in India, especially at the top of the distribution. Both types of inequality are similar in China, although expenditure is more unequally distributed than income in urban areas.China has a much stronger correlation in individual ranks and levels between the two wellbeing distributions. As a result, expenditure inequality is higher in China than in India, but income inequality much lower. This results partially from differences in population composition, such as China being more urbanized and having smaller households, but mostly from differences in conditional income distributions, especially by attained education of the household head.We show that hybrid measures of wellbeing combining income and expenditure can be useful for such cross-country comparison.
    Keywords: Consumption,Consumption expenditure,expenditure inequalities,Income inequality
    Date: 2019
  18. By: Chao He (East China Normal University); Min Zhang (East China Normal University)
    Abstract: Existing studies of liquidity either focus on firms or consumers. However, both hold significant cash, and firms' share increased since the '90s and fell after the 07-08 financial crisis. We propose a theory of how endogenous investment liquidity and consumption liquidity compete and interact. The consumption-investment liquidity allocation (CILA) channel amplifies the effect of monetary policy on unemployment, as it accounts for 40 percent of the effect in the calibrated model. We also show that a lower nominal interest rate directs relatively more cash to firms, whereas financial frictions induce the opposite and high unemployment, consistent with the observed patterns.
    Date: 2019

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