nep-cna New Economics Papers
on China
Issue of 2021‒11‒29
twelve papers chosen by
Zheng Fang
Ohio State University

  1. U.S. Housing as a Global Safe Asset: Evidence from China Shocks By William Barcelona; Nathan L. Converse; Anna Wong
  2. On the Persistence of the China Shock By Autor, David; Dorn, David; Hanson, Gordon H.
  3. Misappropriation of R&D subsidies: Estimating treatment effects with one-sided noncompliance By Boeing, Philipp; Peters, Bettina
  4. Couples are Made of Four: Intergenerational Transmission of Within-household Allocations By Garcia-Brazales, Javier
  5. AI-tocracy By Martin Beraja; Andrew Kao; David Y. Yang; Noam Yuchtman
  6. FinTech as a Financial Liberator By Greg Buchak; Jiayin Hu; Shang-Jin Wei
  7. Technology Transfer and Early Industrial Development: Evidence from the Sino-Soviet Alliance By Michela Giorcelli; Bo Li
  8. Can labor market institutions mitigate the China syndrome? Evidence from regional labor markets in Europe By Jan-Luca Hennig
  9. Corporate Tax Cuts for Small Firms: What Do Firms Do? By Wei Cui; Mengying Wei; Weisi Xie; Jing Xing
  10. Green Bonds as Hedging Assets before and after COVID: A Comparative Study between the US and China By Guo, Dong; Zhou, Peng
  11. Rapid cost decrease of renewables and storage accelerates the decarbonization of China's power system. By He, Gang; Lin, Jiang; Sifuentes, Froylan; Liu, Xu; Abhyankar, Nikit; Phadke, Amol
  12. Failure of Unravelling Theory? A natural field experiment on voluntary quality disclosure By Tom Lane; Minghai Zhou

  1. By: William Barcelona; Nathan L. Converse; Anna Wong
    Abstract: This paper demonstrates that the measured stock of China's holding of U.S. assets could be much higher than indicated by the U.S. net international investment position data due to unrecorded historical Chinese inflows into an increasingly popular global safe haven asset: U.S. residential real estate. We first use aggregate capital flows data to show that the increase in unrecorded capital inflows in the U.S. balance of payment accounts over the past decade is mainly linked to inflows from China into U.S. housing markets. Then, using a unique web traffic dataset that provides a direct measure of Chinese demand for U.S. housing at the zip code level, we estimate via a difference-in-difference matching framework that house prices in major U.S. cities that are highly exposed to demand from China have on average grown 7 percentage points faster than similar neighborhoods with low exposure over the period 2010-2016. These average excess price growth gaps co-move closely with macro-level measures of U.S. capital inflows from China, and tend to widen following periods of economic stress in China, suggesting that Chinese households view U.S. housing as a safe haven asset.
    Keywords: China; Housing and real estate; Capital flows; Safe assets
    JEL: F30 F60 R30
    Date: 2021–11–12
  2. By: Autor, David (MIT); Dorn, David (University of Zurich); Hanson, Gordon H. (University of California, San Diego)
    Abstract: We evaluate the duration of the China trade shock and its impact on a wide range of outcomes over the period 2000 to 2019. The shock plateaued in 2010, enabling analysis of its effects for nearly a decade past its culmination. Adverse impacts of import competition on manufacturing employment, overall employment-population ratios, and income per capita in more trade-exposed U.S. commuting zones are present out to 2019. Over the full study period, greater import competition implies a reduction in the manufacturing employment-population ratio of 1.54 percentage points, which is 55% of the observed change in the value, and the absorption of 86% of this net job loss via a corresponding decrease in the overall employment rate. Reductions in population headcounts, which indicate net out-migration, register only for foreign-born workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment to trade-induced contractions in labor demand. More negatively affected regions see modest increases in the uptake of government transfers, but these transfers primarily take the form of Social Security and Medicare benefits. Adverse outcomes are more acute in regions that initially had fewer college-educated workers and were more industrially specialized. Impacts are qualitatively—but not quantitatively—similar to those caused by the decline of employment in coal production since the 1980s, indicating that the China trade shock holds lessons for other episodes of localized job loss. Import competition from China induced changes in income per capita across local labor markets that are much larger than the spatial heterogeneity of income effects predicted by standard quantitative trade models. Even using higher-end estimates of the consumer benefits of rising trade with China, a substantial fraction of commuting zones appears to have suffered absolute declines in average real incomes.
    Keywords: import competition, China trade, local labor markets, manufacturing decline, job loss
    JEL: E24 F14 F16 J23 J31 L60 O47 R12 R23
    Date: 2021–10
  3. By: Boeing, Philipp; Peters, Bettina
    Abstract: In evaluating the effectiveness of R&D subsidies, the literature has focused on potential crowding out effects, while the possibility of misappropriation of public funds that results from moral hazard behavior has been completely neglected. This study develops a theoretical framework with which to identify misappropriation. Using Chinese firm-level data for the period 2001-2011, we show that misappropriation is a major threat. 42% of grantees misused R&D subsidies for non-research purposes, accounting for 53% of the total amount of R&D subsidies. In a second step, we study the loss of effectiveness of R&D subsidies in stimulating R&D expenditures that is due to misappropriation. We measure the loss in effectiveness by estimating the causal effect of R&D subsidies in the presence of misappropriation using an intention-to-treat (ITT) estimator and comparing it to the ideal situation (without misappropriation) using the complier average causal effect (CACE). We find that China's R&D policy could have been more than twice as effective in boosting R&D without misappropriation. R&D expenditures could have been stimulated beyond the subsidy amount (additionality), but noncompliant behavior has resulted in a moderately strong partial crowding out effect. We find significant treatment heterogeneity by period, subsidy size, industry, and ownership. Notably, the loss in effectiveness has diminished following a policy reform in 2006. Nevertheless, the misappropriation of public funds considerably undermines the impact of R&D policies in China.
    Keywords: R&D subsidies,misappropriation,China,moral hazard,policy evaluation
    JEL: O31 O38 C21 H21
    Date: 2021
  4. By: Garcia-Brazales, Javier
    Abstract: There is increasing evidence in favor of non-unitary models of the household. Moreover, gender norms and values have been shown to be transmitted across generations and to affect intra-household allocations. I lever a unique opportunity to observe each spouse’s contributions to income, market, and home hours of parents and children (after forming their own household) in China and Australia to uncover a strong positive correlation between the female spouse’s relative contributions across two generations in the absence of reverse causality. This is robust to the inclusion of a rich vector of controls and provincial fixed effects. Exploiting large exogenous changes in education brought along by the Chinese 1986 Compulsory Education Law, I find that the degree of intergenerational transmission was disrupted by the reform, and that this happened heterogeneously across groups with different parental relative contributions. I further show that this was driven by a change in the attitudes towards gender norms, which suggests that transmission occurs at least partly through socialization and that policies can have a multiplier effect both within and across generations.
    Keywords: Intrahousehold Inequalities,Relative Spousal Contributions,Intergenerational Transmission,China,Australia
    JEL: D10 I24 J16
    Date: 2021
  5. By: Martin Beraja; Andrew Kao; David Y. Yang; Noam Yuchtman
    Abstract: Can frontier innovation be sustained under autocracy? We argue that innovation and autocracy can be mutually reinforcing when: (i) the new technology bolsters the autocrat’s power; and (ii) the autocrat’s demand for the technology stimulates further innovation in applications beyond those benefiting it directly. We test for such a mutually reinforcing relationship in the context of facial recognition AI in China. To do so, we gather comprehensive data on AI firms and government procurement contracts, as well as on social unrest across China during the last decade. We first show that autocrats benefit from AI: local unrest leads to greater government procurement of facial recognition AI, and increased AI procurement suppresses subsequent unrest. We then show that AI innovation benefits from autocrats’ suppression of unrest: the contracted AI firms innovate more both for the government and commercial markets. Taken together, these results suggest the possibility of sustained AI innovation under the Chinese regime: AI innovation entrenches the regime, and the regime’s investment in AI for political control stimulates further frontier innovation.
    JEL: E00 L5 L63 O25 O30 O40 P00
    Date: 2021–11
  6. By: Greg Buchak; Jiayin Hu; Shang-Jin Wei
    Abstract: A binding interest rate cap on household savings is a common form of financial repression in developing economies and typically benefits banks. Using proprietary data from a leading Chinese FinTech company, we study Fintech's role in ending financial repression in China through the introduction of a money market fund with deposit-like features available through an already widely-adopted household payment platform. Cities and banks whose depositor base is more exposed to FinTech see greater deposit outflows. Importantly, exposed banks respond to FinTech competition by offering competing products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.
    JEL: E21 E42 E43 E44 E52 E58 G21 G28 G51
    Date: 2021–11
  7. By: Michela Giorcelli; Bo Li
    Abstract: This paper studies the causal effect of technology and knowledge transfers on early industrial development. Between 1950 and 1957, the Soviet Union supported the “156 Projects” in China for the construction of technologically advanced, large-scale, capital-intensive industrial facilities. We exploit idiosyncratic delays in project completion and the unexpected end of the Sino-Soviet Alliance, due to which some projects received Soviet technology embedded in capital goods and know-how, while others were eventually realized by China alone using domestic technology. We find that receiving both Soviet technology and know-how had large, persistent effects on plant performance, while the effects of receiving only Soviet capital goods were short-lived. The intervention generated horizontal and vertical spillovers, as well as production reallocation from state-owned to privately owned companies since the late 1990s.
    JEL: L2 M2 N34 N64 O32 O33
    Date: 2021–11
  8. By: Jan-Luca Hennig (Trinity College Dublin)
    Abstract: A large literature has shown that trade shocks, such as the rise of China in the global markets, have had negative effects on employment in manufacturing both in the United States and in Europe. This paper analyzes how trade shocks interact with labor market regulations. More specifically, it investigates whether differences in labor market frictions mitigate or amplify the labor market effects of Chinese imports on European regions between 1997 and 2006. To do so, the paper constructs measures of regional exposure to China based on previous literature and on regional labor market frictions exploiting involuntary labor reallocations. The paper finds that regions more exposed to the rise of China have suffered from a reduction in manufacturing employment shares. This shock grows larger with regional labor market friction, hence it exacerbates the impact of trade shock on employment. Moreover, the paper finds that employment in public services, and not in construction or private services sector, absorbed the negative shock to the manufacturing sector. The unemployment rate, the labor force participation rate, and wages in all sectors are unresponsive to import competition from China.
    Keywords: Empirical Trade, Regional Labor Markets, Employment Structure, Labor Reallocation
    JEL: F14 F16 J21 R23
    Date: 2020–08
  9. By: Wei Cui; Mengying Wei; Weisi Xie; Jing Xing
    Abstract: What do small firms do when given an income tax cut? We address this question by examining the consequences of a sharp reduction in the corporate income tax rate for small- and micro-profit enterprises (SMPE) in China based on confidential tax returns. Utilizing the gradual increases in the qualifying threshold for SMPEs during 2010-2016, we find that newly qualified SMPEs with positive taxable income increased investment, interest expense and productivity. SMPEs in taxable losses did not respond to the tax cut. The tax cut induced more SMPEs to register, especially those in financially constrained sectors. Despite these positive effects, firms’ fixed asset growth slows down when they get closer to the SMPE threshold. Our study contributes to understanding the effect of tax preferences for small businesses.
    Keywords: tax incentives, small firms, productivity, investment, firm entry
    Date: 2021
  10. By: Guo, Dong; Zhou, Peng (Cardiff Business School)
    Abstract: The COVID pandemic reveals the fragility of the global financial market during rare disasters. Conventional safe-haven assets like gold can be used to hedge against ordinary risks, but tail dependence can substantially reduce the hedging effectiveness. In contrast, green bonds focus on long-term, sustainable investments, so they become an important hedging tool against climate risks, financial risks, as well as rare disasters like COVID. The copula approach based on the TGARCH model is applied to estimate the joint distributions between green bonds and selected financial assets in both US and China. The quantile-based approach is also performed to offer a robustness check on tail dependence. The results show that all assets in the two countries have thick tails and tail dependence with time-varying features. The hedging effectiveness does decline during the COVID pandemic, but it is the hedging effectiveness against tail risks rather than against normal risks. It is argued that green bonds play a significant role in hedging against rare disasters especially in forex markets. It is also found that green bonds in the US and China converge in many aspects, suggesting a smaller cross-country difference than cross-asset difference.
    Keywords: green bonds; hedging effectiveness; COVID
    JEL: G11 G12
    Date: 2021–11
  11. By: He, Gang; Lin, Jiang; Sifuentes, Froylan; Liu, Xu; Abhyankar, Nikit; Phadke, Amol
    Abstract: The costs for solar photovoltaics, wind, and battery storage have dropped markedly since 2010, however, many recent studies and reports around the world have not adequately captured such dramatic decrease. Those costs are projected to decline further in the near future, bringing new prospects for the widespread penetration of renewables and extensive power-sector decarbonization that previous policy discussions did not fully consider. Here we show if cost trends for renewables continue, 62% of China's electricity could come from non-fossil sources by 2030 at a cost that is 11% lower than achieved through a business-as-usual approach. Further, China's power sector could cut half of its 2015 carbon emissions at a cost about 6% lower compared to business-as-usual conditions.
    Date: 2020–05–19
  12. By: Tom Lane (University of Nottingham, Ningbo China); Minghai Zhou (University of Nottingham, Ningbo China)
    Abstract: Classic ‘unravelling’ theory holds that buyers should treat with maximal scepticism sellers who withhold verifiable information relating to their quality, as buyers infer from such non-disclosure that the seller possesses the lowest possible quality. This study is the first to use a natural field experiment to test this proposition, and the first to test it in a labour market context. We sent out 12,301 job applications, varying the information on degree classification – a signal of academic quality – that the applicant presented to the employer. Our results do not support unravelling theory. Applications which left degree classification undisclosed were significantly more likely to receive positive responses from employers than those disclosing the lowest possible degree classification. Employers treated non-disclosing applicants similarly to those disclosing mid-scale classifications, suggesting the extent to which adverse inference is drawn from missing information is limited.
    Keywords: Voluntary Disclosure; Unravelling; Labour Market; Field Experiment
    Date: 2021–07

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