Economic Research Journal (Monthly) Vol.53 No.6 June, 2018 |
• The Determinants of Bank Interest Rates and Funds Transfer Pricing: Evidence from Interest Rate Liberalization in China |
Summary: The current deregulation of interest rates in China need not be the end of interest rate liberalization. The fundamental goal of interest rate liberalization is to establish an effective market-based interest rate formation and regulation mechanism. One of the key issues the current financial reform is focused on is how to improve the ability of commercial banks to set their own prices. The literature considers bank interest rate pricing from the perspective of the net interest rate margin (e.g., Ho & Saunders, 1981). However, interest rate liberalization in China has its own characteristics.
First, the reforms of the deposit and loan interest rates are unsynchronized. Second, frictions that reduce the efficiency of the market and policy interest rates will affect banks' pricing, such as an imperfectly competitive interbank market and the shadow banking that results in money creation. Therefore, any analysis of banks' pricing and the influence of the interest rate liberalization reform that adopts the perspective of the net interest rate margin may not fully reflect the status quo in China. Such an analysis would fail to properly reveal the asynchrony caused by the inconsistent paces of different interest rate reforms and ignore the asymmetric impacts of the reforms on the external factors affecting bank interest rate pricing.
Using the Ho-Saunders model, we assume that a bank consists of four major branches (Alessandri & Nelson, 2015) and develop a model of interest rate determination considering the characteristics of China's reforms. Deposit rates and lending rates are linked through internal funding prices under the funds transfer pricing (FTP) mechanism, and the pricing factors can be decomposed into market power, operating cost, risk premium, interest rate liberalization, market premium, policy premium and the benchmark interest rate. In contrast to Entrop et al. (2015), we find that the last three factors are important external factors and that the degree of interest rate liberalization plays a key role in banks' pricing.
We verify our theoretical results using micro data on 90 Chinese commercial banks from 1996 to 2015, applying dynamic panel simultaneous equation models estimated with the GMM method, and arrive at three empirical results. First, the deposit and loan interest rates are always endogenously determined. After controlling for the term structure, this endogenous relationship still holds. Second, external factors, such as the market, policy and benchmark rates, are extremely important and their term structure effects are asymmetric. Third, interest rate liberalization can increase the role of lending rates in deposit pricing, improve the effectiveness of external factors and reduce the asymmetry of the maturity structure. Based on our analysis of banking heterogeneity, we believe that the special nature of the dual structure and shadow banking business of Chinese banks has reduced the role of external factors in the pricing of bank interest rates and weakened the effectiveness of interest rate liberalization efforts.
The main contributions of this paper are as follows. First, this paper systematically investigates the impact of interest rate liberalization on the determination of bank interest rates. Although some studies have used the framework of financial liberalization (e.g., Sarr, 2000), they either do not analyze the effects of interest rate liberalization in depth or focus only on the deregulation of banking interest rates (e.g., Liu et al., 2014). Second, we compare the different roles of benchmark, market and policy interest rates with different maturities in banks' pricing. Other studies have been less concerned with the term structure of interest rates. Although Entrop et al. (2015) consider term structure, their main concern is the term structure of reinvestment. Third, we discuss how the liberalization of China's interest rates affects the endogenous relationship between deposit and lending rates and the asymmetric effects of external factors on interest rate pricing.
The pricing mechanism is an important micro-foundation for the interest rate rule in China's monetary policy. This paper is only a beginning. In the future, it will be possible to further explore the impact of liquidity creation, macro prudential supervision and implicit depositary competition on the determination of bank interest rates pricing.
Keywords: Bank Interest Rates; Funds Transfer Pricing; Interest Rate Marketization; Dynamic Panel Simultaneous Equations |
…………………………LIU Mingkang, HUANG Jia and LU Jun (4) |
• Interbank Business, Liquidity Fluctuation and Central Bank Liquidity Management |
Summary: Liquidity management is a key component of monetary policy. In recent years, liquidity in China has become a departure point between the macro and micro periodicals. This phenomenon makes it difficult for the central bank to carry out monetary policy and to manage liquidity effectively. To determine the reason for this liquidity problem, the literature focuses on the micro factors of shadow banking and the effects of traditional monetary policy instruments without considering the role of interbank business. Interbank business is a special scale expansion channel of China's banking institution and impacts the effectiveness of unconventional liquidity management systematically. This framework is not sufficient for exploring the factors behind the liquidity problem in China.
To improve our understanding of liquidity fluctuation, this paper theoretically analyzes the expansion mechanism of interbank business and its influence channel on liquidity fluctuation. By incorporating the characteristics of interbank business and its influences into a new liquidity analysis framework, this paper analyzes the transmission mechanism's dependence on financial regulation, the scale of interbank business and the liquidity level. We then empirically examine the correlation between the intensity of financial regulation, the development of interbank businessand the risk of liquidity by using a panel regression analysis model. We develop a dynamic system model, which includes the “herd behavior” of the money market and liquidity management by the central bank. We use this model to simulate the influence of interbank business on liquidity fluctuation and to analyze the effect of different liquidity management methods the central bank uses.
Based on the empirical analysis of 40 Chinese banks from 2010 to 2016(including state-owned, joint-stock commercial and local corporate commercial banks) and the dynamic system simulation of the central bank's liquidity management, we come to several conclusions. Tighter financial regulation gives commercial banks a strong desire to develop interbank business. Banks' liquidity risks increase with the expansion of interbank business. Interbank business exacerbates the maturity mismatch between assets and liabilities, which intensifies banks' pro-cyclical characteristics and weakens the implementation effect of the central bank's original instruments. Finally, we find that a combined liquidity management method that is based on interest rate and supplemented by unconventional policy instruments is effective.
This paper makes several contributions. From a micro perspective, this paper theoretically analyzes the expansion mechanism of interbank business and the mechanism behind its influence on banks' liquidity fluctuations. We empirically test these hypotheses using data from China's bank industry. At the macro level, by developing a dynamic system model of liquidity management, this paper focuses on the influence of the money market and the whole financial system surrounding interbank business behavior on liquidity and analyzes the effects of different liquidity management methods such as price-based policy instruments and unconventional policy instruments on smoothing the fluctuation of liquidity.
We suggest that the central bank should adjust its traditional management policies of liquidity by including the size and risk of interbank behavior in the variables used in its liquidity management policy. The central bank should also create new instruments for liquidity management and strengthen the coordination between new and traditional instruments. The financial supervision authorities should update regulations that have lagged behind developments in the financial business and the evolution of financial risk and improve the coordination of monetary policy, macro-prudential supervision and micro-prudential supervision to prevent unnecessary volatility in the financial sector caused by overregulation.
Keywords: Regulatory Constraints; Interbank Business; Liquidity Fluctuation |
…………………………PAN Bin, WANG Qufei and YI Zhenhua (21) |
• The Benchmark Yield Curve and Macroeconomy: A Mixed Frequency Monetary DSGE Model |
Summary: The Chinese bond market has developed greatly in recent years. The Chinese bond market is the primary platform for the central bank's monetary policy operation and improves the efficiency of monetary policy transmission. Consequently, it is necessary to introduce Chinese bond information into macroeconomic models. It is well known that monetary policy cannot be implemented without marketing the benchmark interest rate or yield curve.
Although the Shanghai Interbank Offered Rate (SHIBOR) partially plays the rule of the benchmark interest rate in monetary markets, it cannot reflect the real transaction behavior of financial assets and has little effect on monetary policy transmission. SHIBOR cannot provide long-term rate information because it lacks a corresponding trade category. Research suggests that Chinese government bonds have the properties of a benchmark interest rate. Furthermore, the Statistics and Analysis Department of the People's Bank of China has pointed out that a benchmark yield curve composed of government bonds improves monetary policy transmission.
Many studies use reduced form models (e.g., the VAR model) to investigate the relationship between Chinese macroeconomic variables and the interest rate term structure. Some studies are beginning to combine interest rate term structures with DSGE models to analyze the macroeconomic environment. However, these studies are limited by low frequency data information. DSGE models that use low frequency observations may produce biased parameter estimates and cannot make estimates or predictions of varying timescales. If we use high frequency data, then the problem is solved. The main challenge to using high frequency data is determining how to directly introduce high frequency term structure information to specify a mixed frequency DSGE model.
To do this, this paper proposes a mixed frequency model with term structure information built on the framework of a new Keynesian macroeconomic model. First, we build a mixed frequency model with term structure information and perform parameter estimation with Bayesian methods. Second, we introduce sunspot shocks into the mixed frequency model to investigate the phenomenon of Chinese macroeconomic uncertainty. This paper provides the model specification including both determinant and indeterminate solutions. Third, we investigate Chinese macroeconomic behavior with impulse functions and show the rule of the Chinese government bond. Finally, we investigate the robustness of the analysis by including forward-looking monetary policy rules and other kinds of output gaps.
For our empirical analysis, we choose the monthly government bond yields that come from the Chinese inter-bank market. We also collect monthly CPI and quarterly GDP data. Using the parameters we estimate with Bayesian methods, we plot the impulse functions. The empirical results show that the mixed frequency model, which includes the yield curve, can identify Chinese macroeconomic uncertainty and significantly improves the timeliness of macroeconomic analysis. With the government bond taken as the benchmark interest rate, the yield curve better reveals the mechanism of monetary policy instability behavior. Furthermore, the results of the mixed frequency models are robust to various specifications of the monetary policy rule and output gap. This means that setting government bonds as the benchmark interest rate is consistent with the behavior of China's financial market.
Our mixed frequency DSGE model shows the importance of interest rate term structure information. It demonstrates the deep and timeless connection between China's benchmark yield and economy. This paper suggests that the central bank should pay more attention to the useful information contained in yield curves when setting monetary policy. Of course, the real economy is also heavily influenced by international factors such as trade policy and the exchange rate. In future work, we plan to build mixed frequency models with term structure information in open economic conditions.
Keywords: Benchmark Interest Rate; Term Structure; Mixed Frequency Data; DSGE Model |
…………………………SHANG Yuhuang and ZHENG Tingguo (36) |
• Marx's World Market Theory and Its Practical Significance: A Comment on the Fallacy of the “Reverse Globalization” Trend |
Summary: As an important part of Marx's “Six Book Plan”, world market theory is part of the overall theoretical system of political economics that Marx hoped to complete but did not. It is of great theoretical significance for the study of Marx's theory of political economics to analyze the specific content of world market theory by looking at Marx's comments on the world market. Marx's brilliant discussion of the world market is also a starting point for studying new issues and new situations in the current world market. Since the 2008 international financial crisis, the global economy has continued to slump, trade protectionism has risen and there has been a surge in “reverse globalization”. It is of great practical significance to explore the problems of reverse globalization and to provide the correct guidance for global governance by applying Marx's world market theory.
Both domestic and foreign scholars have paid great attention to Marx's world market theory, but theoretical and applied studies have not yet formed a complete system. Therefore, building on the author's preliminary theoretical study, “Marx, Engels, Lenin, and Stalin on International Trade”, this paper presents Marx's world market theory and its practical significance in a comprehensive way.
Some studies point out that Marx's world market theory originates from the bourgeois classical politician, but there is a lack of systematic understanding of these classical political scientists' world market thoughts. Therefore, this paper seeks to understand the source of Marx's world market thoughts more accurately. From a practical point of view, the current reverse globalization policy trend has surged. Although studies have considered the performance, trend and influence of reverse globalization, the phenomenon of reverse globalization has yet to be studied from the perspective of Marx's world market theory, an attempt made by this paper.
By systematically combing through the world market ideas of Petty, Smith, Ricardo and Sismondi, and using Marx's insights into the world market, this paper improves our understanding of Marx's world market. This sheds light on important factors that promote the formation of the world market, such as the rise of the city, the opening of new trade routes, the outbreak of the industrial revolution and developments in transportation and communications. This study also makes clear the dialectical relationship between the world market and the capitalist mode of production, the world market and the financial crisis and the important role played by the world market in the process of communism replacing capitalism. Insight is also gained into the basic rules of the world market operation.
This paper proposes that world market theory is the extension and application of the theory of surplus value and labor value to the world. World market theory has important practical significance for the rise of economic globalization, the establishment of the international economic order and the promotion of trade liberalization. These trends can be used to criticize the phenomenon of reverse globalization from four directions. First, it is the fundamental contradiction of capitalism that led to the global economic crisis and its related problems. Second, the old international economic order causes imbalances in global economic development. Third, the bourgeoisie uses trade policy to safeguard the interests of the ruling class. Fourth, impeding regional integration is preventing global integration.
Marx's world market theory makes several suggestions for dealing with reverse globalization. First, leaders should actively participate in globalization and to further open to the outside world. Second, leaders should set a goal of raising the efficiency of labor production and promoting the establishment of a fair and rational new international economic order. Third, leaders should look to strengthen China's role in the development of the world market and promote the development of a higher-level open economy.
Keywords: World Market; Free Trade; International Order; Reverse Globalization |
…………………………YANG Shengming and WANG Qian (52) |
• The Return on Capital in China: Estimation Based on q-theory |
Summary: During the last 40 years of China's economic reforms, the investment rate in China has mainly risen. Moreover, compared with other countries, China's investment rate is indeed high (Zhang & Xu, 2014). Does such a persistently high investment rate mean that the return on capital in China is also high? Bai et al. (2006) find that the return on capital in China is probably significantly higher than in most other economies. The analytical framework of Bai et al. (2006) has become the standard for calculating the return on capital in China from the macro perspective. Bai et al. (2006) calculate the return on capital using the derivation of the rental price of capital equation proposed by Hall & Jorgenson (1967). However, the rental price of capital equation is derived from neoclassical investment theory (Jorgenson, 1963), whose one major failing, as widely pointed out by scholars, is that it ignores the impact of adjustment costs on real capital investment.
We believe that Bai et al. (2006) and subsequent Chinese scholars who use their framework to estimate the return on capital in China inevitably have failed to account for the impact of adjustment costs, making the accuracy of their estimations questionable. Adjustment costs, which are prevalent in the investment and production processes of firms, make it difficult to reach the optimal level of capital investment. Therefore, we need to develop a new measurement framework to determine the return on capital that includes adjustment costs.
Appling the q-theory model of investment from macroeconomics and the production-based asset pricing model from financial economics (Cochrane, 1991, 1996), this paper establishes a model of return on capital that accounts for adjustment costs and then uses macro data to estimate the return on capital in China. If there were no adjustment costs, the basic model of return on capital constructed in our paper would simplify to the return on capital model constructed by Bai et al. (2006) (hereafter referred to as Bai's method). Therefore, the return on capital model of Bai's method is a special case of the return on capital model constructed in our paper.
In theory, the revised neoclassical investment model that considers adjustment costs is equivalent to the q-theory of investment. It can be proved that the main difference between our model of return on capital with adjustment costs and Bai's method is whether the impact of adjustment costs is considered. In other words, with other conditions equal, due to the adjustment costs, it is equivalent to increase the investment costs of a firm. Therefore, the return on capital that we estimate should be lower than the estimates that use Bai's method.
In the three estimation equations of return on capital in this paper, the adjustment cost parameters need to be estimated. We apply the GMM method of Hansen (1982) to estimate the adjustment cost parameters. Based on the method of adjusting cost, the average return on capital in the base case is 7.95%, which is about 61.73% lower than Bai's method. The average return on capital calculated by our method excluding production tax is 7.88%, which is about 35.67% lower than Bai's method. The average return on capital calculated by our method excluding the production tax and enterprise income tax is 7.75%, which is about 24.83% lower than Bai's method. These results suggest that the return on capital in China may not be significantly higher than that in other economies.
Since the 2008 global financial crisis, the decline in the return on capital in China has shown no sign of stopping. When excluding the production tax and enterprise income tax, the return on capital decreased from 9.82% in 2008 to 3.02% in 2014. Therefore, the return on firm investment has fallen sharply, an issue demanding immediate attention.
Keywords: Return on Capital; Adjustment Cost; q-theory; Production-Based asset Pricing Model |
…………………………LIU Renhe, CHEN Yingnan, JI Xiaomeng and SU Xuejin (67) |
• Investment Bank Collusion on Analyst Hype and Its Consequences for Social Welfare in the Chinese IPO Market |
Summary: U.S. IPO regulations stipulate an IPO quiet period, extending from the SEC file date until the 25th or 40th calendar day after listing, during which analysts are restricted from issuing public reports on the firm undergoing the IPO. In contrast, the Chinese Securities Regulatory Commission (CSRC) requires that the underwriting investment bank disclose research reports on the investment value for IPO stocks to institutional investors participating in the IPO offline auction process. In addition, the CSRC never forbids unaffiliated analysts from issuing public reports on IPOs before listing. Are analysts in China subject to severe conflicts of interest? How do analysts' reports influence the offering price? What is the interest distribution pattern that is shaped by analyst behavior in this context? The literature does not pay enough attention to these questions.
Using unique research reports on the investment value of IPO stocks issued by underwriters, this paper examines the hyping behavior of analysts before an offering price is determined, including its existence, mechanism and consequences. The main findings are as follows: (1) In the reports prepared for institutional investors bidding on the stocks, the earnings forecasted by the underwriter-affiliated analyst deviate positively from the real earnings. As a result, the IPO valuation based on this forecast is much higher than the aftermarket trading price. Similarly, the IPO valuations from unaffiliated analysts demonstrate high deviations from aftermarket prices. These findings imply that both kinds of analyst reports have become tools to hype IPOs, caused by the conflict of interest between underwriting and analyst research in investment banks. (2) There is a well-developed reciprocal underwriting network in which investment banks form stable relationships to collude on analyst reports for IPO valuations. A stronger relationship between two investment banks increases the likelihood that analysts affiliated with one bank issue reports on the IPOs underwritten by the other bank and increases the positive deviation of the recommended price from the underwriter's valuation. Analyst reputation is not able to mitigate this kind of quid pro quo as the literature sometimes suggests. (3) The hyping by analysts promotes overly optimistic sentiments by investors, increasing their demand for IPOs and resulting in price bubbles. Thus, the issuer raises more money than expected and the underwriter profits from the increased spread. However, hyped IPOs underperform in the aftermarket, implying that investors bear all of the losses.
Based on these conclusions, we suggest that research reports on the investment value for IPO stocks made by underwriters should be disclosed publicly so that the hyping behavior of analysts can be disciplined by the market. At present, these analyst reports are only available to institutional investors who participate in the offline pricing of IPOs, meaning that most retail investors are not allowed to read them. This opacity in the current system allows underwriters to avoid responsibility for the negative effects of their reports. We suggest that the whole report should be included in the formal IPO prospectus as a legally required document so that all investors, including retail investors, have access to the report. The supervision and pressure from these investors and the market should help to limit the hyping behavior of underwriters and their analysts.
This paper makes three contributions to the literature. First, the evidence that analyst hyping can influence investor sentiment refutes the usual premise in theoretical models of IPOs that investor sentiment is exogenously determined. We show one way in which investor sentiment is endogenously determined. Second, the network collusion hypothesis extends the literature on the behavior of unaffiliated analysts. Third, we identify clearly individual investors as the losers in the process of IPO wealth allocation.
Keywords: Underwriting Networks; Collusion on Hype; Investor Sentiment; Welfare Effect |
…………………………SHAO Xinjian, HONG Junjie and LIAO Jingchi (82) |
• Policy Uncertainty and Earnings Management by Listed Companies |
Summary: The relationship between governments and firms has been a long-standing research topic in the fields of corporate finance and accounting. The government is an abstract concept, and its relationship with enterprises is ultimately determined by the relationship between core government officials and firms. This relationship is fundamentally different in China than in Western countries. The regional policy uncertainty caused by changes in core officials has the macro-policy cost of a political change in firms' operating environment. The turnover of core local government officials has great influence on firms' financial behavior, especially their earnings management. This cost of changes in policies is important but has not received adequate attention in China. A natural question to ask is, what is the mechanism connecting macro-regional level policy uncertainty to micro-level firm behavior?
This paper uses data on changes in municipal party committees in China from 2001 to 2016 to study whether firms change their earnings management in the face of policy uncertainty. Our empirical results show that, when faced with the policy uncertainty caused by changes in the core government leaders, listed firms have an incentive to carry out more earnings management, particularly firms with profit reduction motives. Further analysis shows that this earnings management leads to a decline in the quality of accounting information that is particularly obvious in firms that have a local political connection, ultimately private property rights and that are located in regions with a low quality of local government.
We measure the intensity of policy uncertainty with characteristics of the local leaders' change and the new leader's source and then investigate the influence of policy uncertainty intensity on earnings management. We find that more policy uncertainty leads to a stronger motivation of firms to engage in earnings management. The influence of policy uncertainty brought about by changes in local core officials has decreased with the anti-corruption efforts started after the 18th National Congress of the Communist Party of China. Finally, we examine the robustness of these findings to different measures of earnings management, the use of propensity score matching and the use of a difference-in-differences model. This paper shows that in China, changes in the principal officials in a region leads to an increase in earnings management and a decline in the quality of accounting information.
This paper makes several contributions. First, different from the international literature studying policy uncertainty, which is based on election events and party turnover, we believe that policy uncertainty in China is reflected better in changes in local leaders who have a major impact on the local economy. Some Chinese scholars focus on corporate financial behavior (Xu et al., 2013; Dai et al., 2014; Luo et al., 2016) and the information environment (Chen et al., 2018). The conclusions of this paper add to both of these literatures and to the emerging literature on policy uncertainty and corporate behavior in the context of China. This paper also contributes to our understanding of macro-policy and micro-firm behavior in China's institutional context (Rao & Jiang, 2013). Secondly, if we start from the hypothesis of a policy cost in empirical accounting, policy uncertainty is an external event triggered by the policy cost of firms and embodies a policy cost different from that given in the earnings management and accounting policy literatures. The link between the policy uncertainty caused by the replacement of local leaders and the accounting behavior of micro-enterprises in China makes it clear that the replacement of local officials may also be an important cause of earnings management. Furthermore, we investigate the impact of political connections, local government quality and heterogeneity in enterprises, allowing us to enrich and refine our hypothesis of a policy cost in the financial and accounting fields.
Keywords: Policy Uncertainty; Official Turnover; Earnings Management; Accounting Information Quality |
…………………………CHEN Deqiu and CHEN Yunsen (97) |
• Who Is Willing to Destock, State-owned or Non-state-owned Real Estate Enterprises? |
Summary: Since the implementation of the advance sales system for commercial buildings in 1995, the real estate industry in China has developed rapidly, contributing to the growth of China's economy. The increasing scale of investment in real estate has fulfilled citizens' needs for residential housing, but industry-wide overinvestment resulting from “irrational exuberance” in the real estate market has led to an overstock of commercial buildings. This overstock has become an important issue for the central government of China, leading it to issue a policy in 2016 that requires real estate enterprises to destock as part of one of the five major missions of the Supply-Side Structural Reform undertaken during the 13th Five-Year Plan.
To suppress the over-expansion of the real estate market and to cap the dramatic rises in house property prices, the central government has issued a series of macro-control policies, such as the “Eight Regulations of the State Council”, the “Six Regulations” and the “Eleven Regulations”. These regulations are partially effective, but the overstock problem has stubborn roots that are closely related to the fiscal decentralization reform and to the assessment system of local government officials.
The sale of lands to real estate companies is a major source of income for China's local governments and the growth in GDP resulting from a booming real estate market facilitates the promotion of local government officials, as GDP growth is the most important criterion when assessing an official's performance. Byproducts of destocking include a decline in investment, high unemployment rates and a reduction in income, which in turn impedes the growth of the local economy. In addition, a dramatic drop in property prices may lead to systematic financial risk and social unrest. Therefore, local governments have strong incentives to interfere in the investment decisions of the state-owned real estate companies. Local governments can directly influence the operational decisions of SOEs, and therefore have both the incentive and capability to interfere in the inventory adjustment behavior of state-owned real estate enterprises. We hypothesize that state-owned real estate enterprises are less likely to destock than their non-state-owned counterparts.
Making use of the unique institutional background of China's transition economy, this study investigates whether the nature of ownership impacts the destocking behavior of real estate enterprises with a sample of listed companies in the real estate industry from 2003 to 2017. After controlling for other factors that influence destocking, our empirical results show that state-owned real estate companies are less likely to destock than their non-state-owned counterparts. Further tests show that this phenomenon is more pronounced when the controlling shareholder holds a larger share and when companies are in areas with poor GDP growth. In addition, when state-owned real estate companies have a pyramidal structure to insulate themselves from political interference, the likelihood of destocking increases.
Our study contributes to both theory and practice in several ways. First, we examine overinvestment in the real estate industry from the perspective of inventory investment, differing from prior studies of overinvestment in other industries. Second, we explore the underlying reasons for the overstock of commercial buildings and finds that intervention by local governments plays an essential role, contributing to the literature on governments' influence over corporate behavior for economies in transition. Our findings have policy implications for China's ongoing supply-side structural reform and for the quality change in economic development proposed by the 19th CPC National Congress. Third, our findings suggest that the privatization of state-owned real estate companies is one way to promote destocking. By supporting the “Return Order”, which prohibits enterprises owned by the central government from conducting real estate business, our study sheds new light on the reform of state-owned enterprises.
Keywords: Real Estate Enterprises; Nature of Ownership; Government Intervention; Destocking |
…………………………LIU Bin, HUANG Kun and WANG Lei (112) |
• Margin Trading, Short Selling and Firm Innovation: The Perspectives of Quantity and Quality |
Summary: A major reform to margin trading and short selling in China's stock markets is allowing for two types of trading for the same stock to happen simultaneously. In practice, margin trading is far more active than short selling. However, the literature focuses on the impact of short selling, and few studies explore the potential effect of margin trading, in particular on firm innovation. In addition, most studies investigate innovation by Chinese firms in terms of their R&D expenditures and quantity, ignoring innovation quality and potential innovation strategies. Many important questions about the economic impact of the reform on margin trading and short selling remain unanswered.
This paper analyses how margin trading and short selling affect innovation through information and corporate governance mechanisms. Information asymmetry between investors and firms affects firm innovation. The reform also influences firm innovation by affecting the agency problem of managers. Informed short selling alleviates information asymmetries by increasing the idiosyncratic information component of stock prices. It may also place a downward pressure on prices that disciplines or exacerbates myopic managerial behavior. The ultimate impact of short selling on innovation is undetermined.
In contrast, margin trading, which is dominated by retail investors in China's stock markets, is more likely to be uninformed or noise trading that worsens the information asymmetry by decreasing idiosyncratic information. It also drives the rises in stock prices that make managers myopic by motivating managers to increase or maintain the stock price. As a result, margin trading is more likely to impede firm innovation. Putting these considerations together, the final impact of the reform on innovation is unclear in theory, making it an empirical question when both types of credit trading are introduced simultaneously.
This paper uses a sample consisting of listed firms whose stocks were eligible for credit trading from 2010 to 2013 to empirically test the impact of margin trading and short selling on firm innovation quantity and quality by using difference-in-differences (DID) models. To address the potential endogeneity of the DID models, this paper uses a propensity score matching approach to match each firm whose stock was eligible with the same number of firms whose stocks were not eligible. We use diagnostic tests of the propensity score model, balance tests and trend analysis to assure that our sample meets the DID model's basic assumptions of randomness and a common trend. Furthermore, using detailed patent data, this paper constructs different measures of innovation quantity, quality and strategies.
The paper arrives at three conclusions. First, short selling is positively associated and margin trading is negatively associated with both the quantity and quality of innovation. Margin trading accounts for almost all credit trading, so the negative impact of margin trading on firm innovation dominates the positive impact of short selling, impeding firm innovation aggregately. These findings hold when potential endogeneity is addressed by additional methods, when the potential effects of different matching methods and ownership are controlled for, when alternative proxies for innovation are used and when a longer event window is used. Second, the potential mechanisms include both the corporate governance and information mechanisms, which other studies rarely consider. Third, under the complex impact of credit trading, firms strategically create a false boom by making more patent applications, while their patents' grant rate, originality and number of claims decrease significantly.
This paper contributes to the literature in four ways. First, by analyzing a situation where margin trading and short selling were introduced simultaneously, this paper empirically tests the impact of both margin trading and short selling on firm innovation and discerns their differences, filling a gap in the literature. Second, this paper modifies proxies for firm innovation by constructing a comprehensive set of measures using detailed patent data. This dataset is used to empirically investigate the impacts of the reform on innovation quantity and quality and to analyze how firms strategically react to such reforms. Third, this paper demonstrates that the information channel is an important way that credit trading affects firm innovation. Fourth, the findings of this paper enrich the literature on the relationship between finance and firm innovation.
Keywords: Margin Trading; Short Selling; Innovation Quantity; Innovation Quality; Patent |
…………………………HAO Xiangchao, LIANG Qi and LI Zheng (127) |
• A Study of China's Urban Vehicle Energy Consumption and Public Transport Efficiency |
Summary: China's urbanization level has increased as its economy has developed rapidly. The vehicle sector, an important part of the transportation industry, has also entered a rapid growth stage. By the end of 2016, China's automobile ownership reached 194 million, with 27.52 million automobiles newly registered. Both numbers set historical records. The rapid development of the vehicle sector has led to a substantial increase in energy consumption. In 2015, China's automobile energy consumption accounted for about 9.4% of the nation's primary energy consumption and more than 50% of China's oil consumption. With the current growth rate of 28 million automobiles annually, the energy consumption of vehicles is expected to expand rapidly.
The urban public transportation system is the major engine of a city's economic development and the key to enhancing a city's competitiveness. The development of urban public transport provides people with more efficient modes of transport. Can highly efficient urban public transport systems effectively reduce the energy consumption of automobiles? This is an important issue that needs to be clarified, especially as urban public transport development is being prioritized. It is necessary to provide evidence to support policies for developing urban public transport in the future. This paper analyzes the effects of urban public transport efficiency on reducing vehicle energy consumption.
This paper considers the operational data of different types of buses and taxis in 36 major central cities in China from 2010 to 2015, applying a non-radial direction distance function (NDDF) method to evaluate the operational efficiency of urban public transportation. Overall, the efficiencies of both buses and taxis increased during this period, but the improvement in bus efficiency was not as large. The average efficiencies of buses and taxis in 2015 were 0.56 and 0.62, respectively, which was still relatively low. This indicates that there is still plenty of room for improvement in the operational efficiency of urban public transport.
Next, we calculate the energy consumption of small-scale private cars in each city. Based on this, we determine the inhibitory effects of urban public transport efficiency on vehicle energy consumption. We use an IV-GMM method to deal with endogeneity problems and to obtain more reasonable estimates. The impact of the operational efficiency of urban buses on vehicle energy consumption is significantly negative, indicating that improvements in urban public transport efficiency can effectively reduce the growth of vehicle energy consumption. The results are robust to the possibility of endogeneity and survive a stability test.
To better understand the impact of income effects, we estimate the threshold effect of income. Our results indicate that the impact of urban bus efficiency on vehicle energy consumption gradually weakens as per capita income increases. In other words, improvements in the efficiency of urban public transport are more effective at reducing vehicle energy consumption in cities with lower per capita income. This may be due to the income elasticity of demand or differences in vehicle ownership. At present, China's vehicle ownership remains relatively low. For cities with high per capita income, the demand for vehicles is strong and vehicle ownership is still in a stage of rapid expansion. As such, improvements in the efficiency of urban public transport have a smaller impact on vehicle energy consumption. For cities with lower income per capita, vehicle ownership is at a low level. The inhibitory effect of improved urban public transport efficiency is thus more obvious.
Keywords: Urban Transport Efficiency; Vehicles Energy Consumption; Non-radial Directional Distance Function |
…………………………LIN Boqiang and DU Zhili (142) |
• How Immigrant Populations Affect City Entrepreneurship Activity: Mechanisms and Evidence |
Summary: China is experiencing one of the largest population migrations in history as a result of loosened regulations on household registrations and increased industrialization and urbanization. The immigrant population in China has increased, especially since the 1990s, growing from 6.57 million to 253 million in 2014, 18.4% of China's total population. Meanwhile, entrepreneurship in China has also emerged, showcasing the tremendous advantages in overcoming the challenges confronted in urbanization, such as job creation, industry upgrading and structural transformation. Entrepreneurship is of central importance to the Chinese economy during its transitioning period. Thus, it is important to understand how immigrant populations influence city entrepreneurship activity. Little attention has been paid to this topic in the literature.
Sociology scholars have investigated immigrant entrepreneurship from cultural and structural approaches (Rath & Kloosterman, 2000). They focus on the mechanisms at a micro rather than macro level, viewing immigrants as a regional factor affecting regional entrepreneurship activity. The few studies that take a regional perspective (enclave theory) are also criticized for the over-socialization of immigrant entrepreneurship (Ram & Jones, 2012). The literature provides a good understanding of the impact of immigrants on city entrepreneurship activity. However, there is still much room for improvement. First, to understand the mechanisms behind immigrants' activeness in city entrepreneurship, the literature has mentioned entrepreneurial rent (returns) and entrepreneurial opportunities, yet few studies have clearly revealed the cyclic accumulation and correlation between these two factors and a city's immigrant population. Therefore, it is difficult to identify the endogenous mechanisms connecting immigrants to a city's entrepreneurship activity.
Second, the most important gap in the literature is the absence of studies of transitional economies such as China. Understanding China would help us to understand the entrepreneurial mechanism in transitional economic markets. More importantly, because of the differentiation in terms of Chinese regional economic and institutional development levels, understanding it would enrich the literature on economic geography and institutional research in entrepreneurship.
To examine the relationship between immigrants and entrepreneurship activity in a city, we assume heterogeneity across entrepreneurs' career choices in a footloose entrepreneur model with vertical linkage by theoretically modeling the underlying mechanism of this relationship. The literature suggests that a large market size, knowledge spillover and low intermediate prices are key drivers behind a city's attractiveness to immigrants and its entrepreneurship activity. Using a fixed effects model and the Driscoll & Kraay approach with a panel dataset including 56 cities in China covering the east, mid and west regions from 2010 to 2014, we find a positive relationship between the proportion of immigrants in a city and the city's entrepreneurship activity. We investigate the boundary conditions of this core relationship. Good institutions and a well-developed Internet economy can lower entrepreneurial risks, provide resources and lead to knowledge spillover that strengthens the core relationship.
This paper complements the literatures on new growth theory, knowledge spillover and entrepreneurship by exploring the mechanisms behind how immigrants affect entrepreneurship activity. Our results provide direct empirical evidence for innovation and entrepreneurship resulting from the changes in policies on household registration and entrepreneurship in China.
Future studies should build in two directions. First, they should differentiate between different types of entrepreneurship and identify the underlying mechanisms between immigrants and entrepreneurship activity. Second, they should consider the immigrant integration process from a micro perspective, as it is an important factor that influences individual entrepreneurship decisions.
Keywords: City Entrepreneurship Activity; Immigrant Population; Footloose Entrepreneur Model with Vertical Linkage; Entrepreneurship Choice |
…………………………YE Wenping, LI Xinchun and CHEN Qiangyuan (157) |
• Institution and City: How Traditional Land Property Rights Protection Enhances the Efficiency of New Town Construction |
Summary: As China rapidly urbanizes, local protections of land property rights strongly influence the efficiency of new town construction.
The construction of new towns is one component of urban expansion. Industries choose locations with affordable land (Von Thünen, 1826; Alonso, 1964; Mills, 1967; Muth, 1969). Due to the increasing demand for land and technological progress in commuting and communication, cities are continuing to expand (Brueckner, 2000; Glaeser & Kahn, 2004). According to the core-periphery model of urban systems, new cities will emerge in peripheral regions when the market potential is sufficiently large (Fujita & Krugman, 1995; Fujita et al., 1999).
Since 2008, China has seen the large-scale construction of new towns. The number and planned acreage of these new towns has soared dramatically, but most of these new towns are located far away from old downtowns. As population density is related to agglomeration and scale economies and the distance from downtown is a measure of accessibility to the nearest market, the economic competitiveness of many of these new towns is poor. Accordingly, these remote, large-scale, and high-standard new towns struggle to attract people and industries, resulting in poor economic performance and gloomy prospects; some have even been described as “deserted towns” and “ghost towns” by the media.
Why are these new towns so unsuccessful? This study argues that poor land property rights protection is one of the main reasons. New town construction itself is a process of allocating land resources; therefore, problems in this process lead to inefficient construction. According to the economic literature, property rights systems guarantee that property prices reflect the value of the resource. A transparent and complete property rights system can indirectly improve resource allocation efficiency and economic performance (Coase, 1937, 1960; North, 1981, 1990). North (1981) argues that institutional change is of path dependence because of the lock-in effect. In China, each region's informal institutional environments are shaped by the regional history. The resulting institutional differences still play an important role in modern economic development (Huang, 1986, 1991) and consequently determine the efficiency of new town construction by local governments.
Using a manually collected panel dataset on city-level new town construction, matched with city-level variables describing traditions of land property rights protection, this study addresses two questions. How does traditional land property rights protection influence the construction of local new towns? As an institutional factor, does traditional land property rights protection affect new town construction differently under steady economic growth and economic slowdowns?
The study finds that cities with better traditional land property rights protection plan new towns with higher densities, less land, and shorter distances from the city center. In particular, the identified relationship between institutions and efficiency in new town construction has mainly existed since 2009, when new town construction was widely used to offset the economic slowdown.
This study concludes that although decisions about new town construction seem to be made by local governments, their construction is determined by local traditional land property rights protection. To promote the efficiency of new town construction, it is better to first improve the local institutions in addition to monitoring density and distance. Building a modern economic system based on sound property rights protection is a fundamental requirement.
Using new town construction as an example, this study demonstrates the important effects of institutions on economic efficiency and long-term development, further enriching the literature on institutional economics and providing guidance for policymakers who are cultivating modern economic institutions in developing countries. Only when property rights protection is embedded in people's values and behavior, can China achieve virtuous and sustainable economic development.
Keywords: Land Property Rights; New Town; Efficiency; Distance; Density |
…………………………LU Ming, CHANG Chen and WANG Danli (171) |
• Buddhist Faith, Business Credits and Institutional Change: The Vicissitude of Temple Finance in China's Medieval Ages from a New Institutional Economics Perspective |
Summary: Religion has played a significant role in the development of global finance. Of the three religious sects in ancient China (Confucianism, Buddhism and Taoism), Buddhism had the biggest temples and the most influential religious financial organizations. The period from the Wei, Jin, Northern and Southern Dynasties to the Sui and Tang Dynasties is defined as China's Medieval Ages, during which Buddhism spread throughout China and temple finance sprang up and reached its zenith. Temple finance was a financial system beyond kinship and stimulated social capital involvement distinct from local traditional financial systems. Temple finance was a pioneer in the history of finance and played a crucial role.
With detailed historical materials, this paper depicts the interaction between the development of temple finance and the spread of Buddhism. From the perspective of new institutional economics, this paper tries to analyze how the Buddhist faith, as an informal institution, influenced transaction costs and led to an institutional change in economic organizations. Using mathematical models, this research uncovers the concrete mechanism of how the Buddhist faith in the Medieval Ages influenced the development of temple finance and derives implications of its rise.
We find that temples in China's Medieval Ages maintained commercial credits through the Buddhist faith. The Buddhist faith motivated believers to donate their assets and constrained borrowers, exhibiting fundamental differences between temple finance and contemporary local financial systems. This explains how temple finance succeeded in the Northern and Southern Dynasties and became the first financial institution to make loans based on social capital. However, the disadvantage is that the commercial credits built by temple finance were vulnerable. Once the public's passion faded, it triggered a decline in donations and an increase in defaults, causing temple finance to shrink. This hypothesis is proved given that temple finance declined rapidly with the drop in Buddhist fanaticism after the middle of the Tang Dynasty.
It was important to establish commercial credit relying on religious beliefs, but that was still far from enough. To keep the commercial credit steady, it was necessary to accept legal supervision and secularization. Enforced by third parties, laws are binding and mandatory for lenders and borrowers, narrowing expectation biases in human-to-human economic transactions, reducing opportunism and promoting cooperation. A good informal system is the “lubricant” of the formal system and can reduce the operating costs of the formal system. Coherent informal and formal systems are mutually reinforcing and can establish well-ordered and low-cost societies and organizations. To this end, it was necessary to enhance commercial credit through pledges, mortgages, guarantees and official laws. This was the target of the Chinese financial industry after the middle of the Tang Dynasty, of the Western financial industry after Martin Luther's reform and of the Islamic financial industry.
Although temple finance declined, the temple as a large-scale financial institution established an important precedent. Later generations of local financiers learned from temple finance, which relied on religious belief to establish commercial credits, combining this with their own characteristics. As a result, they were able to surpass temple finance in the establishment and management of commercial credits. This laid a solid foundation for the great economic development of commodity currencies in the Ming and Qing Dynasties. The development of temple finance and local finance systems provides strong evidence that institutional changes that increase the efficiency of economic organizations can arise from positive interactions between informal and formal institutions.
This study calls attention to the construction of financial ethics. Financial ethics embody the features of financial institutions, and financial institutions reflect the requirements of financial ethics. This paper fills gaps in the microeconomic literature on China's medieval temple finance and provides an overall picture of temple finance during that period.
Keywords: Buddhist Fanaticism; Temple Finance; Commercial Credit; Transaction Cost; Institutional Change |
…………………………ZHOU Jianbo, SUN Shengmin, ZHANG Bo and ZHOU Jiantao (186) |
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