Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

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Interest Rate Volatility Regimes in Selected Asian Countries: A Univariate Markov Switching Analysis
Dicle Ozdemir
Front. Econ. China    2020, 15 (1): 56-69.   https://doi.org/10.3868/s060-011-020-0003-3
Abstract   PDF (438KB)

Business cycle dynamics are determined by relatively large volatilities in output, consumption, and investment, which leads to cyclical fluctuations in interest rates. Using the Markov switching model, we model the nominal interest rate movements to explain the volatility regime shifts in a set of selected emerging Asian economies. The estimated results provide significant evidence of regime-dependent means, variances, and probabilities in both stable and volatile regimes in selected countries, confirming the existence of two distinct regimes in nominal interest rate movements. In addition, the smoothed probability results of switching autoregressive model show that the model is capable of capturing the two regimes for the corresponding nominal interest rate behaviors. Besides, the results reveal that the stables regimes have higher durations than the volatile regimes. This study also shows the advantage of Markov switching models over conventional regression models, allowing the identification of different regimes for the cyclical behavior of interest rates.

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Forecasting Chinese Corporate Bond Defaults: Comparative Study of Market- vs. Accounting-Based Models
Michael Peng, Dongkai Jiang, Yingjie Wang
Front. Econ. China    2019, 14 (4): 536-582.   https://doi.org/10.3868/s060-008-019-0022-8
Abstract   PDF (1675KB)

This paper provides the first empirical study on bond defaults in the Chinese market. It overcomes the deficiencies of existing methods, which suffer from lack of actual default data for back testing. With newly available bond default data, we analyze the roles of market variables against accounting variables under various models. While we find that Merton’s market-based structural model and KMV’s Distance to Default exhibit languid discriminating power compared with hazard models that have carefully constructed predictors, other market variables carry significant information about bond defaults and could help improve on models with only the accounting variables. This implies that the collective intelligence of the market could somehow mitigate the distortion caused by misreported accounting information. Further, model performance can be significantly improved by adding predicting variables that link an individual financial measure to the broader market performance, such as the relative margin—a business environment proxy introduced in this study. We not only shed light on the default behavior of the Chinese bond market, but also provide a promising approach to improve the variable selection process.

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Multi-Dimensional Product Differentiation
Qihong Liu, Jie Shuai
Front. Econ. China    2019, 14 (4): 497-535.   https://doi.org/10.3868/s060-008-019-0021-1
Abstract   PDF (602KB)

We analyze product differentiation in a multi-dimensional model with non-uniform consumer distribution. The level of product differentiation is measured by both unit transport costs and firms’ locations. Our analysis concerns both measures. First, fixing firms’ locations, we show that equilibrium prices can increase or decrease with unit transport costs. The overall result depends on the interplay of a shifting effect and a rotating effect—the latter exists only in multi-dimensional models. Second, fixing unit transport costs, we find that under non-uniform distribution, there may exist no equilibrium where firms maximize differentiation on one dimension but minimize differentiation on other dimensions. Instead, there may exist an equilibrium where firms choose intermediate locations, contrary to common findings in existing studies which assume uniform distribution.

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Promote Competitive Neutrality to Facilitate China’s Economic Development: Outlook, Policy Simulations, and Reform Implementation—A Summary of the Annual SUFE Macroeconomic Report (2019–2020)
Kevin X.D. Huang, Zixi Liu, Guoqiang Tian
Front. Econ. China    2020, 15 (1): 1-24.   https://doi.org/10.3868/s060-011-020-0001-9
Abstract   PDF (816KB)

Twenty nineteen (2019) marked another year of lethargic growth in the Chinese economy amidst escalated internal and external complexities. Internally, the country’s macroeconomic landscape was overcast continuously by fallen consumption growth, plunged growth in manufacturing investment, rapid accumulation of household debt, risen income inequality, and the overhang of local government debt. The nation’s external conditions did not fare any better, with drastically declined growth in imports and exports, continued trade tensions with the US, and weakened external demand. Based on the IAR-CMM model, which takes account of both cyclical and secular factors, the baseline real GDP growth rate is projected to be 6.0% in 2020 (5.9% using more reliable rather than the official data), with a downside risk. Alternative scenario analyses and policy simulations are conducted, in addition to the benchmark forecast, to reflect the influences of various internal and external uncertainties. The findings emanated from these analyses lead us to stress the importance and urgency of deepening reform to achieve competitive neutrality for China’s transformation into a phase with sustainable and high-quality development.

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Firm-Level TFP Growth in the Chinese Automobile Industry
Xiaoheng Zhang, Xu Tian
Front. Econ. China    2020, 15 (1): 103-123.   https://doi.org/10.3868/s060-011-020-0005-7
Abstract   PDF (543KB)

China has been the world's largest automobile producer since 2009, but it still lags behind other countries in terms of productivity. Based on the National Bureau of Statistics of China (NBSC) firm-level data and the improved approach proposed by Ackerberg et al. (2015), this paper investigates the contribution of total factor productivity (TFP) growth to the Chinese automobile industry and evaluates the impact of firm entry and exit on TFP growth. The empirical results show that the TFP of the Chinese automobile industry grows at 10.7% per year. Joint venture and foreign-owned firms have a significantly higher TFP growth rate than others. Large-scale firms have a higher TFP growth rate than do small-scale firms, but the latter have caught up after 2004. Moreover, the entry of new firms and exit of old firms significantly improve the aggregate TFP growth rate.

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Project Matching and Overcapacity in China
Lixue Wu, Cheng Liu
Front. Econ. China    2019, 14 (4): 629-669.   https://doi.org/10.3868/s060-008-019-0025-9
Abstract   PDF (901KB)

Based on the features of China’s project investment, we consider the formation of production capacity as a matching behavior between local governments and investment enterprises. Using the search and matching model, we illustrate that the excess capacity in China mainly results from the asymmetry between the gains from and contribution to the project matching: The capacity will be excessive when the proportion of local governments’ return exceeds its contribution to the project, and the more unbalanced the return–contribution relationship, the more severe the overcapacity. Meanwhile, we test this theoretical prediction based on a quasi-natural experiment: the reform of administrative approval system. The empirical results show that the reduction of the local governments’ return–contribution ratio will significantly raise the capacity utilization rate and mitigate the overcapacity. Industry-specific regression results further indicate that governments’ return–contribution asymmetry is more prominent in industries dominated by state-owned enterprises, high-monopoly industries, heavy industries, and industries with serious overcapacity. This paper offers a novel mechanism of overcapacity, a theoretical criterion for judging optimal capacity, and some new regulatory tools with the micro foundation.

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The Transition of Thoughts on Grain Control in the Qing Dynasty: A Survey of the Great Debate on the Ever-Normal Granary and Grain Prices in 1748
Fang Wang, Hongzhong Yan, Duo Zhang
Front. Econ. China    2020, 15 (1): 25-55.   https://doi.org/10.3868/s060-011-020-0002-6
Abstract   PDF (503KB)

The ever-normal granary system was an official granary management system in ancient China. Throughout its existence, the system functioned as a major means of adjusting the price of grain and provided disaster relief. Few studies on the system touches upon the relationship between grain price fluctuation and the development of the grain market, or the ever-normal granary system and its related economic school of thoughts. Starting with the development of the grain market and the relationship between the price of grain and grain reserves, and through a systematic review of the debate on the ever-normal granary system and grain prices among high-level officials of the Qing government in the 13th year of Emperor Qianlong’s reign (1748), this paper analyzes the historical process and reasons for the change in thoughts on the ever-normal granary system and discusses the historical path of how economic phenomenon gave rise to the clash of economic thoughts that influenced the evolution of this economic institution.

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Liquidity Shock, Credit Constraint and the Development of Private vs. State-Owned Enterprises
Qing Shi, Chen Wang, Wei Wang
Front. Econ. China    2019, 14 (4): 583-603.   https://doi.org/10.3868/s060-008-019-0023-5
Abstract   PDF (1236KB)

Based on firm level data for the period of 1998–2007, this paper attempts to explain the growth differences between private enterprises and state-owned enterprises (SOEs) in China, in the context of liquidity shocks, and institutional and financial environments. It is found that (1) when liquidity tightens, the private enterprises face stricter credit constraints than SOEs, which restricts the development of private enterprise; (2) when liquidity becomes abundant, private enterprises face fewer financial limitations and grow much faster than SOEs; (3) the effect of liquidity shocks on the growth rate gap between private enterprises and SOEs has weakened during the period 2002–2007. These findings reveal that the credit discrimination against private enterprises can be mitigated by improving institutional and financial environments, which weaken the effects of liquidity shocks on firm growth.

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How Firms’Ownership Structure Impacts Online Peer-to-Peer Lending Performance in China
Guangying Xie
Front. Econ. China    2020, 15 (1): 70-102.   https://doi.org/10.3868/s060-011-020-0004-0
Abstract   PDF (583KB)

A dramatic surge in online peer-to-peer (P2P) lending emerged in China, where (under conditions of credit deficiency) it took only three years for the size of the P2P lending market in China to reach four times that of the United States and ten times that of the United Kingdom. The literature indicates that ownership structure is an important factor that influences P2P lending firms’ performance, while research on the underlying mechanisms remain insufficient. This study analyzes the data of P2P lending companies between June 2016 and March 2017. The results demonstrate that although ownership structure has minimal direct effect on the turnover volume and number of lenders and borrowers, it moderates the effects of firm age, interest rate, and loan term on firm performance. These results enrich the property theory and shed light on how P2P lending firms with different ownership structures could succeed when there is institutional deficiency.

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A Global-Optimal Portfolio Theory beyond the R-σ Model
Yifan Liu, Shi-Dong Liang
Front. Econ. China    2020, 15 (1): 124-139.   https://doi.org/10.3868/s060-011-020-0006-4
Abstract   PDF (1428KB)

Deviations from the efficient market hypothesis allow us to benefit from risk premium in financial markets. We propose a three-pronged (R, σ, H) theory to generalize the (R, σ) model and present the formulation of a three-pronged (R, σ, H) model and its Pareto-optimal solution. We define the local-optimal weights (wR, wσ,wH) that construct the triangle of the quasi-optimal investing subspace and further define the centroid or incenter of the triangle as the optimal investing weights that optimize the mean return, risk premium, and volatility risk. By numerically investigating the Chinese stock market, we demonstrate the validity of this formulation method. The proposed theory provides investors of different styles (conservative or aggressive) an efficient way to design portfolios in financial markets to maximize the mean return while minimizing the volatility risk.

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Sustainability of Monetary-cum-Exchange Rate Policy in China
Hiroya Akiba
Front. Econ. China    2019, 14 (4): 604-628.   https://doi.org/10.3868/s060-008-019-0024-2
Abstract   PDF (729KB)

This paper theoretically considers the long-run sustainability of China’s monetary-cum-exchange rate policy under the impossible trinity. Two different models are examined: One sterilizes current net foreign assets (NFAs) and the other focuses on NFAs realized in the previous period. Under the de facto opening of financial flows, sterilization yields a negative risk premium in uncovered interest parity (UIP) that triggers a feedback increase among capital inflows. Here, stability depends on the magnitudes and the combination of structural and policy parameters. It is shown that if current capital inflows are sterilized, the monetary-cum-exchange rate policy in China offers a sustainable solution for exchange rates that are relatively stringently managed. However, such a solution can be obtained for relatively flexible or moderately managed rates if sterilization policy is implemented on the previous period’s inflows.

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