Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

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Why Does the World Need a Reserve Asset with a Hard Anchor?
Dongsheng Di, Warren Coats, Yuxuan Zhao
Front. Econ. China    2017, 12 (4): 545-570.
Abstract   PDF (835KB)

From the 1970s, the global currency system has two features: the use of one or a few sovereign currencies as the global reserve asset and the floating exchange rate regime between major currencies. This paper points out that the costs of the dollar’s use as an international reserve currency exceed the benefits for both the US and the rest of the world. These costs include the exporting of American manufacturing as a byproduct of its current account deficit needed to supply its currency to the rest of the world. In addition to the detriment to trade from unpredictable exchange rate fluctuations, the termination of the U.S. obligation to redeem its currency for gold also removed an important restraint on deficit financing for the US and many other countries in the short-run, thus promoting excessive leverage that was a major contributor to the 2008 financial crisis. The paper suggests replacing several main countries’ currencies in international reserves with a real Special Drawing Right (SDR) issued according to currency board rules.

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Rethinking Globalization in the Trump Era: US-China Relations
Joseph E. Stiglitz
Front. Econ. China    2018, 13 (2): 133-146.
Abstract   PDF (272KB)

The global economic and political order that was created in the aftermath of World War II is under attack by President Donald Trump. In this article, Nobel Prize Laureate Joseph Stiglitz discusses the scope for protectionist actions by President Trump and suggests how countries such as China could and should respond. In particular, he proposes a set of ten principles that should guide China’s response, principles designed to enhance a more stable and efficient multi-polar system of global governance that can contribute to a stronger global economy.

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Examining the Factors Affecting Personal Income: An Empirical Study Based on Survey Data in Chinese Cities
Lihui Wang, Junyi Shen
Front. Econ. China    2017, 12 (4): 515-544.
Abstract   PDF (441KB)

This paper empirically analyzes the factors affecting personal income in urban China using survey data of the “Preference and Life Satisfaction Survey” conducted by the Global COE project of Osaka University from 2009 to 2013. We consider education level as an endogenous variable, and both ordinary least squares (OLS) regression and instrumental variable (IV) regression are performed. We find a number of factors, such as sex, age, education, and marriage that significantly affect personal income. In addition, differences between different occupations are also investigated.

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Product Market Competition and Innovation: What Can We Learn from Economic Theory?
Zhiqi Chen
Front. Econ. China    2017, 12 (3): 450-464.
Abstract   PDF (231KB)

By means of a literature review, this paper strives to provide some clarity on the much-debated relationship between product market competition and firms’ incentives to innovate. It shows that in the literature there does not exist a robust relationship between competition and incentives to innovate. Therefore, it would be futile to continue the debate over whether competition stimulates or hinders innovation. A more useful approach is to make a distinction between pre-innovation competition and post-innovation competition, as it provides a way for reconciling many of the seemingly contradictory findings from the literature. Another important insight from the literature is that the relationship between competition and innovation depends on the source of increased competition.

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Hidden Reserve Prices with Risk-Averse Bidders
Huagang Li, Guofu Tan
Front. Econ. China    2017, 12 (3): 341-370.
Abstract   PDF (469KB)

In this paper, we provide an alternative explanation for why auctioneers often keep the reserve price hidden or secret. We consider a standard independent private values environment in which the buyers are risk-averse and the seller has private information about her valuation of the object to be auctioned. The seller uses a first-price sealed-bid auction mechanism combined with either an announced reserve price or a hidden reserve price. We compare the seller’s ex ante expected profits under these two policies and find that the optimal hidden reserve price policy generates higher expected profits for the seller when the buyers are fairly risk-averse under particular restrictions on buyers’ preferences and the distributions of private values. As the number of the buyers increases, the hidden reserve price is more likely to dominate. Numerical methods are used to demonstrate the generality of our main results.

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Industrialized Innovation: The Connection of Science & Technology Innovation with Industrial Innovation
Yinxing Hong, Yao Lu, Jianghuai Zheng
Front. Econ. China    2017, 12 (3): 400-417.
Abstract   PDF (302KB)

In light of the relationship and the current disconnection between science & technology (S&T) innovation and industrial innovation in China, it is necessary to put forward and emphasize the concept of industrialized innovation. Industrialized innovation is the bridge and intermediation between S&T innovation and industrial innovation, which is not only a concept, but also a mechanism and combination force. There are two ways to achieve industrialized innovation: through industry-university-research coordination and through technology entrepreneurship. The meaning of industry-university-research coordination is not about coordination among industry, university and research sectors in an institutional sense; rather it is about the coordination of the functions of cultivation and development in new industries, new technologies, and new talents of industrialized innovation. The incentive mechanism for industrialized innovation should motivate not only innovation but also coordination. Technology entrepreneurship is the industrialization of new technology through business start-ups, which occurs beyond the stage of incubation and development of new technology. The capital of technology entrepreneurship is the set consisting of knowledge capital manifested through technological innovation, human capital manifested through entrepreneurs, and physical capital in the form of venture capital. While physical capital is indispensable, knowledge capital and human capital play the decisive role in technology entrepreneurship. The industrialization of technological innovation involves two requirements: one is to enable the new technology industry to achieve a large scale rapidly, and the other is to fully realize the potential value of the new technology. Both requirements are reliant on effective innovation in business models.

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Audit Competition in Insurance Oligopolies
Nicolas Boccard, Patrick Legros
Front. Econ. China    2017, 12 (3): 371-399.
Abstract   PDF (762KB)

We provide a simple framework for analyzing how competition affects the choice of audit structures in an oligopolistic insurance industry. When the degree of competition increases, fraud increases but the response of the industry in terms of investment in audit quality follows a U-shaped pattern. Following increases in competition, the investment in audit quality will decrease if the industry is initially in a low competition regime while it will increase when the industry is in a high competition regime. We show that firms will benefit from forming a joint audit agency only when the degree of competition is intermediate; in this case, cooperation might improve total welfare and we analyze the effects of contract innovation on the performance of the industry.

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Conquering China’s Unbalanced and Inadequate Development: Macroeconomic Outlook, Policy Simulations, and Reform Implementation—A Summary of Annual SUFE Macroeconomic Report (2017–2018)
Kevin X. D. Huang, Lei Ning, Guoqiang Tian
Front. Econ. China    2018, 13 (2): 147-170.
Abstract   PDF (5025KB)

Leaving year 2017 China’s macroeconomy is continuously characterized by unbalanced and inadequate development. Whereas some aggregate indicators have shown improvement over the year, the cumulative growth rates in consumption and fixed asset investment have continued their downward trajectories. Worsening income inequality and resource misallocations, both between secondary and tertiary industries, and within the latter, pose serious challenges, let alone the systemic risk associated with the flourishing shadow banking system, rapid credit growth and debt overhang that weigh on the Chinese economy like the Sword of Damocles. This summary report highlights both the status quo and the consequences of the unbalanced and inadequate development embodied in China’s persistently distorted economic structure, and the role of deepening reforms of the institutions and governance in resolving the problems. Our analyses based on IAR-CMM model provide a unified framework for addressing China’s short-, medium-, and long-term issues in an internally coherent manner. Looking into year 2018, our benchmark projection of real GDP growth rate is 6.7% (6.41% using more reliable rather than the official data). Alternative scenario analyses and policy simulations are conducted to reflect various aspects of the economic challenges in the short to long runs. Through the lens of these analyses we conclude that rule-of-law based and market-oriented structural reforms should continue to hold a center stage in China’s transition from a phase of high-speed but unbalanced growth, to a stage of balanced and adequate high-quality development.

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Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power
Ngo Van Long, Maxwell Tuuli
Front. Econ. China    2018, 13 (1): 32-51.
Abstract   PDF (338KB)

This paper demonstrates that an increase in bargaining power of Northern firms relative to that of their Southern contractors can trigger reshoring if the North-South wage differential is moderate, such that only industries with a high share of unskilled labor find outsourcing profitable. However, such an increase in Northern bargaining power can increase offshoring if the wage differential is so high that even industries with a low share of unskilled labor also offshore.

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Are Central and Western Chinese Provinces Catching up with the East? An Empirical Analysis of Convergence Processes across China
Marlies Schütz, Han Li, Nicole Palan
Front. Econ. China    2017, 12 (4): 571-606.
Abstract   PDF (1748KB)

Since the Reform and Opening-up policy had been implemented in 1978, mainland China has experienced significant economic growth, with GDP rising on an annual average of about 10%. However, this growth miracle was far from being evenly distributed across space. It is, therefore, the aim of this paper to study the evolution of spatial disparities in economic development across the country between 1993 and 2012, a period which is characterized by all provinces having access to international markets and being open for international investors. We seek to answer the question of whether Central and Western Chinese provinces were catching up with the East. We define ‘catching up’ as a growing similarity among spatial units. Convergence processes might manifest in four dimensions, including (1) the spatial allocation of employment, value added generation and the fixed capital stock, (2) forms of technical change, (3) productivity patterns, and (4) income distribution. Results show that persistent phases of convergence appeared. However, in some cases the catching up of China’s less developed parts with the flourishing East was limited to only a few Western and Central Chinese provinces. A high degree of path-dependency in economic development prevented catching up from taking place in a more uniform manner.

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Global Value Chains, Horizontal Intra-Industry Trade and the Heterogeneous Firm
Sven W. Arndt
Front. Econ. China    2018, 13 (1): 68-82.
Abstract   PDF (789KB)

This paper examines global value chains at the level of the heterogeneous firm. The context is a world of horizontal intra-industry trade, characterized by imperfect competition and product differentiation at the firm level. Standard microeconomic tools are employed to assess the effects of inter-firm dissimilarities in both demand and supply on firms’ responses to changes in trade policy. In this set-up, dissimilarities in firm characteristics play roles similar to factor endowments and technology differences in traditional trade models. When cross-border production sharing (“fragmentation”) is introduced into this framework, those differences in firm characteristics determine the degree to which individual firms will enter into production networks. In this context, horizontal and vertical intra-industry trade elements interact in their effects on firm decisions. Traditional comparative advantage considerations still govern the choice of off-shored activities, while direct competition between imports and exports expands the range of possible outcomes. Finally, it is shown that cross-border production sharing reduces the sensitivity of firms to variations in exchange rates, matching a phenomenon that has been observed in traditional country-level models.

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A Model of Endogenous Cross-Holdings in Oligopoly
Cheng-Zhong Qin, Dandan Zhu, Shengping Zhang
Front. Econ. China    2017, 12 (3): 465-479.
Abstract   PDF (287KB)

A network approach is proposed to analyze the formation of cross-holdings and anti-competitive implications. Our approach is motivated by the bilateral arrangement of passive ownership between Microsoft and Apple in 1997. We provide a complete characterization of pairwise stable cross-holdings for a model of Cournot oligopoly with a homogeneous product. Our results strengthen the competitive implications of endogenous cross-holdings in Cournot oligopoly found in the literature.

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Agglomeration and Firm Export
Churen Sun, Zhihao Yu, Tao Zhang
Front. Econ. China    2018, 13 (1): 116-132.
Abstract   PDF (320KB)

Using Chinese manufacturing data between 1998 and 2007, this paper investigates the impact of agglomeration on firm’s export behavior. It is found that the agglomeration of manufacturing industries in China over this period increases firm’s export probability as well as its export volume, and the impact is larger for more efficient firms. However, the impact on firm’s export volume depends on the degree of agglomeration. When the degree of agglomeration is low, an increase in agglomeration would expand firm’s export volume but the impact will be diminishing and even turns negative if the degree of agglomeration is already very high.

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Technical Progress and the Diffusion of Innovations: Classical and Schumpeterian Perspectives
Heinz D. Kurz
Front. Econ. China    2017, 12 (3): 418-449.
Abstract   PDF (4170KB)

The paper discusses the diffusion of new technologies from the perspective of the classical economists and Schumpeter. After a comparison of the pre- and post-technical change long-period positions of the economy, we illustrate the process of transition between the two in terms of a two-sector model. Next, we turn to a system with joint production. The fact that some products may be “bads” that need to be disposed of leads to a study of systems of production-cum-disposal. Finally, we investigate the selection pressure innovations exert on incumbent firms. An important message is that technical change cannot generally be studied within a partial framework of the analysis.

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Local Import Competition in a Lumpy Country
Alan V. Deardorff
Front. Econ. China    2018, 13 (1): 5-14.
Abstract   PDF (441KB)

This paper examines the effects of a fall in the price of an imported good in a region of a country that is specialized in producing that good. The context is a “lumpy country” model in which factors are unable to move between locations, although in this case I assume that only labor is immobile, and that the other factor, capital, is perfectly mobile between regions. With mobile capital, the lumpy-country equilibrium can be anywhere in the factor-price equalization set, but my focus is on a region that initially produces only one good, on the border of that set. When the price of that good falls due to import competition, it would be possible for both factors to reallocate partially into production of the other good, but I assume instead that some capital simply leaves the region, so that it continues to produce only the same good that it did before. The result of this is a fall in the real wage of labor, just as under Stolper-Samuelson assumptions. I then look at production also of a non-traded good, and find that the same import competition that cheapened the traded good also cheapens the nontraded good. The result is that the region shrinks, losing capital and producing less of both goods unless the substitution in favor of the nontraded good expands its consumption out of a smaller income.

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Short-Term and Long-Term Margins of International Trade: Evidence from the Canada-Chile Free Trade Agreement
Zhiqi Chen, Marcel C. Voia
Front. Econ. China    2018, 13 (1): 93-115.
Abstract   PDF (3335KB)

We investigate the impact of the Canada-Chile Free Trade Agreement (CCFTA) on Canadian exports to Chile, particularly the dynamic effects of the agreement on extensive and intensive margins of trade. Consistent with the literature, we find that the extensive margin effects occurred later than the intensive margin effects and became more prominent in the long-term. Surprisingly, the intensive margin effects died off in the long-term. A theoretical model is constructed to show that our results can arise in a standard setting of intra-industry trade.

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The Effects of Macroeconomic Policies in a Mercantilist Economy
Gaowang Wang, Heng-fu Zou
Front. Econ. China    2018, 13 (2): 171-195.
Abstract   PDF (365KB)

By introducing money and foreign exchange in the Zou (1997) model of mercantilism, the paper shows the effects of macroeconomic policies in mercantilist economies. It is shown that in the long run, consumption and foreign asset accumulation increases as a result of stronger mercantilist sentiments, permanent increases in the consumption tax, increases in the monetary growth rate and purchases of foreign bonds. In the short run, however, macroeconomic disturbances including the mercantilist sentiments, the monetary growth rate, and the consumption tax have negative effects on current consumption and positive effects on current foreign asset accumulation, while purchasing foreign bonds has positive effects on both current consumption and current foreign asset accumulation. The theoretical explorations may provide a theoretical structure for hoarding international reserves and export-led growth strategy utilized by emerging market economies.

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Private Label Positioning and Product Line
Stéphane Caprice
Front. Econ. China    2017, 12 (3): 480-513.
Abstract   PDF (779KB)

This article examines (i) how retailers position private label products, (ii) why private labels are sold in some product categories but not in others, and why some national brand products may have difficulty in accessing retailers’ shelves, (iii) why some private label products are positioned as ”premium” brands, and (iv) how consumers’ surplus and totalwelfare are affected by private labels. We find that private label positioning leads to less differentiation in product category, which structurally changes a retailer’s product line in return. Consumer welfare and total welfare are lower.

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Revenue-Constrained Combination of an Optimal Tariff and Duty Drawback
Tatsuo Hatta
Front. Econ. China    2018, 13 (1): 52-67.
Abstract   PDF (349KB)

A duty drawback is an export subsidy determined as a percentage of the tariffs paid on the imported inputs used in its production. This paper examines the revenue-constrained optimal tariff structure in a small open economy including a duty drawback as a trade policy tool. This paper has two main aims. First, we show that the revenue-constrained optimal combination of tariff and duty drawback for a given revenue level is not unique. Second, we show that if the optimal import tariff rates are all positive when the duty drawback rate is zero, then the optimal import tariff rates are always positive when the duty drawback is positive.

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Decision Making and Ability: An Explanation of Elitism in China’s Government
Shiqiang Li
Front. Econ. China    2017, 12 (4): 635-659.
Abstract   PDF (471KB)

This article tries to explain elitism in China’s governmental decision making. Our model shows that the governments’ expected utility increases with a bureaucrat’s ability to make decisions under the flexible framework of delegation and communication (with separated reporting strategy). In the early of 1950s, China’s government choose a flexible decision making framework in order to efficiently manage many affairs in a complex environment. This initial choice started the process of a self-reinforcing demand for ability inside of the flexible decision making framework. With the current reforms of streamlining administrations and retreating from the market, the elitism of China’s government might reverse.

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Asymmetric Decentralization, Intergovernmental Transfers, and Expenditure Policies of Local Governments
Yongyou Li
Front. Econ. China    2018, 13 (2): 223-248.
Abstract   PDF (399KB)

Although China’s asymmetric fiscal decentralization system has been criticized for many years, there have been few studies giving direct evidence of its negative incentives on local government spending policies. By introducing the mechanism of asymmetric decentralization and fiscal transfers to the objective function of local government, this paper studies the incentive effects of asymmetric decentralization and fiscal transfers on spending policies of local governments, and uses the provincial panel data to carry out an empirical test. The conclusion shows that the asymmetric decentralization significantly weakens the incentives of local government to increase social expenditure, and as a solution to asymmetric decentralization, fiscal transfers fail to play a good role. Due to the relatively large income effect, the financing mechanism of fiscal transfers not only significantly reduces the incentives of local government to provide social public goods, but also weakens the constraint effect of fiscal competition on expenditure policies of local governments because of the increase in the relative cost. Although the distribution mechanism of fiscal transfers has a significant positive incentive to local government in regions where the net inflow of fiscal resources is more than zero, because of common pooling effects, the comprehensive effects of fiscal transfers in the distribution of incentives of local governments to provide social public goods are negative in all regions.

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An Overlapping-Generations Model of Firm Heterogeneity in Economic Development
Yu Chen, Haiwen Zhou
Front. Econ. China    2017, 12 (4): 660-676.
Abstract   PDF (323KB)

We study firm heterogeneity in economic development in an overlapping-generations general equilibrium model in which manufacturing firms engage in oligopolistic competition. Individuals differ in their productivities in the manufacturing sector and choose to become entrepreneurs or workers. The model is surprisingly tractable. In the steady state, an increase in the entry barrier in the manufacturing sector or an increase in the percentage of income spent on the agricultural good decreases the wage rate, but the level of output in the manufacturing sector does not necessarily decrease. An increase in the degree of patience of an individual increases the steady state wage rate and the capital stock. Even with increasing returns in manufacturing and constant returns in agriculture, neither the wage rate nor the output level in the manufacturing sector may increase with population size.

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Can a Government Initiate Enterprise Reform to Improve Efficiency? A Cross-Section Analysis of the Chinese Pharmaceutical Industry
Ying Chu Ng, Suthathip Yaisawarng
Front. Econ. China    2017, 12 (4): 607-634.
Abstract   PDF (4456KB)

This paper examines the effects of state-owned enterprises (SOE) privatization, implemented by the Chinese government in the 1990s, on enterprise efficiency for a sample of non-privatized SOEs and privatized ex-SOEs. The study calculates input-oriented DEA meta-frontier efficiency scores, after accounting for heterogeneity in technology across groups. These scores are used to test whether or not one group’s technology dominates the other. A measure of additional input saving is also provided if these enterprises have access to unrestricted meta-technology. The analysis of the Chinese pharmaceutical industry reveals that privatization has not improved enterprise efficiency, at least in the short run. Almost 56% of inputs could be proportionally saved if these privatized ex-SOEs had been efficient, relative to the meta-production technology while non-privatized SOEs could proportionally save only 51%. Privatized ex-SOEs had less ability to access to meta-technology. This finding could be explained by subsequent observations that China, at the time of our analysis, did not have well-established intellectual property rights and formal drug approval procedures; these two factors are important driving forces for developing joint ventures with foreign investors to gain additional capital funding and technology transfer. Broadly speaking, our results are consistent with the subsequent shakeup in the Chinese pharmaceutical industry.

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Involuntary Unemployment: An Expository Note
Henry Y. Wan Jr.
Front. Econ. China    2018, 13 (1): 83-92.
Abstract   PDF (738KB)

This note is an effort to view the research program of Brecher and his co-workers to deploy tax incentives against involuntary unemployment in the broader context; on both the equity-efficiency trade-off in political economy, and the dual economic structure in the theoretic foundations of market equilibrium.

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Free-Trade Agreements in a Model of Trade, Migration and Politics
John Douglas Wilson, Ilkay Yilmaz
Front. Econ. China    2018, 13 (1): 15-31.
Abstract   PDF (402KB)

This paper uses a probabilistic voting model to investigate voting for a free-trade agreement between a labor-abundant country and a capital-abundant country. Migration from the labor-abundant country to the capital-abundant country increases the probability of a free-trade agreement, with lower migration costs leading to more migration and a higher free-trade probability. On the other hand, if a lower probability of free trade is caused by an increased voter bias against free-trade candidates, then there is less migration. A dynamic extension of the model is also investigated.

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Does the Entrepreneurship of the Parents Affect the Opportunities of their Offspring’s Entrepreneurship? Empirical Analysis Based on the CGSS 2010–2013 Data
Yongmei Hu, Yun Xing
Front. Econ. China    2018, 13 (2): 196-222.
Abstract   PDF (670KB)

The whole society is paying close attention to “entrepreneurship,” which urges researchers to find an explanatory perspective relatively independent and with causality on the intergenerational transfer of entrepreneurship. Based on the data of the Chinese General Social Survey (short for CGSS) during the years 2010–2013, this paper analyzes how parents’ entrepreneurship affects the probability of their offspring’s entrepreneurship, and the results show that compared with the offspring of parents who did not start their own business, those whose parents did are more likely to choose to start their own business. In view of historical facts such as the “lay-off wave” during China’s transformation into a market economy, we use “the annual number of unemployed back to work,” a provincial-level indicator, in the 1990s as an instrumental variable to correct possible endogenous problems. We find that parents’ entrepreneurship has significant positive effects on the probability of their offspring’s entrepreneurship, which may result from the informal transfer of human capital and wealth from parents to their offspring.

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Agricultural Roots in Intergenerational Transfers in China
Yan Liu, Qingqing Zong
Front. Econ. China    2018, 13 (2): 249-280.
Abstract   PDF (376KB)

Economists have been interested in the motivations of intergenerational transfers, for different motivations affect the effectiveness of anti-poverty public transfers. However, one’s motivation is largely shaped by culture and social conventions. This paper sheds light on the influence of rice cultivation in intergenerational transfers in China. This is also the first time that economists consider cultural factors in the study of intergenerational transfers. Cultivating rice requires elaborate irrigation systems and large amounts of labor input so that rice farmers have to cooperate extensively with their neighbors, which has gradually shaped people’s value to be more inter-dependent. Based on micro-level data from CHARLS and sub-national rice data from China, our empirical results show strong evidence that individuals from rice regions are more likely to provide economic support for their parents. A one-percentage point increase in the share of rice in the total grain planting area will raise transfer incidence by 0.2–0.4 percentage points, and rice region residents transfer on average 300–400 yuan more in 2011 and about 1,000 yuan more in 2013 to their parents than those from wheat regions. Meanwhile they are more inclined to rely on their adult children for elderly support. Urban citizens are less affected. Using instrumental variable estimation, we are able to prove the effect is causal. With future continued deepening of population aging in China, relying on children for old age support may become more and more unrealistic, the government needs to coordinate the relationship between public transfer and private transfer to ensure the quality of life for the elderly.

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Does Over-credit Stimulate Corporate Investment? Evidence from Listed Companies in China
Yuying Jin, Dong Zhao
Front. Econ. China    2018, 13 (2): 281-311.
Abstract   PDF (695KB)

We define and quantify for the first time over-credit at the firm level, which refers to the case in which the amount of bank credit that a firm obtains exceeds its expenditure on corporate investment for the year. Then, we explore how over-credit affects corporate investment to determine whether credit expansion in China is consistent with the principle of finance serving the real economy. The results show that over-credit promotes firm investment, and this effect was enhanced by the housing boom. However, the effect of the property market reversed after 2012, owing to China’s economic transition from a quantitative to a structural mismatch between supply and demand. Finally, we explore how over-credit affects the capacity utilization ratio and whether it has aggravated the overcapacity problem in China. The results show that over-credit reduces firms’ capacity utilization ratio. This finding indicates that excessive credit expansion has exacerbated the overcapacity problem in China.

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