Members of the NBER's Chinese Economy Working Group met September 26-27 in Cambridge. Research Associates Nancy Qian of Northwestern University, Shang-Jin Wei of Columbia University, and Daniel Xu of Duke University organized the meeting. These researchers' papers were presented and discussed:
Jing Cai, University of Maryland and NBER, and Adam Szeidl, Central European University
Direct and Indirect Effects of Financial Access on SMEs
Cai and Szeidl use a field experiment with 2,800 small and medium enterprises (SMEs) in 100 local markets in China to measure the direct and indirect effects of access to finance. In 2013 in Jiangxi province a large rural bank introduced a new loan product targeted to SMEs. The researchers created an information treatment about this product and randomized the treatment both within and across local markets. Using data from three survey waves they document the following preliminary results. (1) Treated firms were 33 percentage points more likely than control firms to start borrowing from the rural bank, while borrowing from other sources did not vary by the treatment. (2) Treated firms exhibited significantly higher growth than control firms in revenue, profit, factors, inputs, number of clients, use of trade credit, and entry into formality. (3) More than a third of this difference is accounted for by the relatively poorer performance of control firms in markets in which more peer firms were treated. These results suggest that in Cai and Szeidl's context SMEs faced credit constraints, reducing credit constraints improved firm performance, and much of the improvement came via business-stealing effects.
Li Feng, Shanghai Jiao Tong University; Jun Qian, Fudan University; Haofei Wang, Shanghai Jiao Tong University; and Lei Zhu, Fudan University
Stock Pledged Loans, Capital Markets, and Firm Performance: The Good, the Bad and the Ugly
Stock pledged loans--loans with shareholders' stock as collateral--is prevalent among Chinese listed firms. At the end of 2016, the largest shareholder of a listed firm pledges a greater fraction of her stock holdings in exchange for credit when the firm is in a growth industry, more financially constrained, less profitable and not majority owned by the government. The performance of firms with high levels of stock pledged loans is not significantly different from those with low levels of stock pledged loans in 2017. During the bear market of 2018, highly pledged firms face greater stock crash risk due in part to "forced sales" of pledged stock, have worse stock returns and higher likelihood of default, and worse operating performance. There is also a "contagion" effect from the selling of one high-pledged stock to another. Using a policy shock in 2013 that allowed securities companies to provide stock pledged loans to listed firms, Feng, Qian, Wang, and Zhu find that obtaining these loans relaxed firms' financial constraints and improved firm performance during 2013-2014. However, this lending channel imposes substantial risk on the firms during stock market downturns, and concentrated selling of pledged stock can impose systemic risk on the market.
Alain de Janvry and Elisabeth Sadoulet, University of California, Berkeley; Guojun He, Hong Kong University of Science and Technology; Shaoda Wang, University of Chicago; and Qiong Zhang, Renmin University of China
Influence Activities and Bureaucratic Performance: Evidence from a Large-Scale Field Experiment in China
Subjective performance evaluation is widely used by firms and governments to provide work incentives. However, delegating evaluation power to senior leadership could induce influence activities: agents might devote more effort to please their supervisors, rather than focusing on productive tasks that benefit their organizations. De Janvry, He, Sadoulet, Wang, and Zhang conduct a large-scale randomized field experiment among Chinese local government employees and provide the first rigorous empirical evidence on the existence and implications of influence activities. They find that state employees are able to impose evaluator-specific influence to affect evaluation outcomes, and that this process could be partly observed by their co-workers. Furthermore, introducing uncertainty in the identity of the evaluator, which discourages evaluator-specific influence activities, can significantly improve the work performance of state employees.
Daniel Berkowitz, University of Pittsburgh; Yi Lu, National University of Singapore; and Mingqin Wu, South China Normal University
What Makes Local Governments More Accoutable? Evidence from a Website Reform
There is evidence that local governments around the world collect bribes and make inefficient investments. What can influence local governments to reduce corruption and to invest responsibly? Ferraz and Finan (2012) show that local governments in Brazil are less corrupt when their mayors can stand for re-election and when a radio station and/or newspaper monitors them. In China, however, local (county-level) leaders are not elected and the state tightly controls the media. Nevertheless, using a large-scale reform in which some counties were required to post their data and to setup communication links for their constituents on their websites, Berkowitz, Lu, and Wu find that corruption fell substantially and public investments sharply increased in treated versus control counties. The researchers interpret these findings using a model where county leaders benefit from being promoted and from collecting rents and, higher-level governments use postings from private citizens on social media to monitor country governments under their jurisdiction. Consistent with this mechanism, Berkowitz, Lu, and Wu find that following the enactment of the reform citizens in treated versus control counties massively increased their blogging on the social media using words related to government corruption and public investments. Satellite light data and sentiment tests suggest the reform led to an improvement in the quality of public investments in treated versus control counties.
Hanming Fang, University of Pennsylvania and NBER; Linke Hou, Shandong University; Mingxing Liu and Pengfei Zhang, Peking University; and Lixin Colin Xu, The World Bank
Factions, Local Accountability, and Long-Term Development: Theory and Evidence
Fang, Hou, Liu, Xu, and Zhang develop a theoretical model of how factional affiliation and local accountability can shape the policy choices of local officials who are concerned about political survivals, and subsequently affect the long-term local development. They provide empirical evidence in support of the theoretical predictions using county-level variations in development performance in Fujian Province in China. When the Communist armies took over Fujian Province from the Nationalist control circa 1949, communist cadres from two different army factions were assigned as county leaders. For decades the Fujian Provincial Standing Committee of the Communist Party was dominated by members from one particular faction, which the researchers refer to as the strong faction. Counties also differed in terms of whether a local guerrilla presence had existed prior to the Communist takeover. Fang, Hou, Liu, Xu, and Zhang argue that county leaders from the strong faction were less likely to pursue policies friendly to local development because their political survival more heavily relied on their loyalty to the provincial leader than on the grassroots support from local residents. By contrast, the political survival of county leaders from the weak faction largely depended on local grassroots support, which they could best secure if they focused on local development. In addition, a guerrilla presence in a county further improved development performance either by intensifying the local accountability of the county leader, or by better facilitating the provision of local public goods beneficial to development. The researchers find consistent and robust evidence supporting these assumptions. Being affiliated with weak factions and having local accountability are both associated with sizable long-term benefits that are evident in terms of a county's growth and level of private-sector development, its citizens' education levels, and their survival rates during the Great Chinese Famine. Fang, Hou, Liu, Xu, and Zhang also find that being affiliated with the strong faction and adopting pro-local policies are associated with higher likelihood of a local leader's political survival.
Harald Hau and Difei Ouyang, University of Geneva
Capital Scarcity and Industrial Decline: Evidence from 172 Real Estate Booms in China
In geographically segmented credit markets, local real estate booms can divert capital away from manufacturing firms, create capital scarcity, increase local real interest rates, lower real wages, and cause underinvestment and relative decline in the industrial sector. Using exogenous variation in the administrative land supply across 172 Chinese cities, Hau and Ouyang show that the predicted variation in real estate prices does indeed cause substantially higher capital costs for manufacturing firms, reduce their bank lending, lower their capital intensity and labor productivity, weaken firms’ financial performance, and reduce their TFP growth by economically significant magnitudes. This evidence highlights macroeconomic stability concerns associated with real estate booms.
John Ammer and John Rogers, Federal Reserve Board, and Gang Wang and Yang Yu, Shanghai University of Finance and Economics
The Value of Institutional Research: Fund Managers and Monetary Policy Expectations in China
Do asset managers serve their clients better through active efforts to seek higher returns? This is a long-running debate in the finance literature. Ammer, Rogers, Wang, and Yu present novel evidence on this question with a systematic textual analysis of the qualitative discussion in China's fund managers' quarterly reports, from which they infer their near-term expectations for monetary policy. The researchers demonstrate that the aggregate index of manager expectations outperforms both market-based and model-based alternative projections. Furthermore, they find that expectations are even more accurate for funds that commit more analytical resources, proxied by fund size, management fees, and managers' educational background. Ammer, Rogers, Wang, and Yu also show that fund managers act on these expectations, and that correctly anticipating shifts in Chinese monetary policy improves fund performance. They find that net inflows into Chinese money-market funds react to near-term prospects for monetary policy, consistent with a strategic substitution between bank deposits and money fund shares that could weaken the transmission of Chinese monetary policy to the real economy.
Bei Qin, University of Hong Kong; David Stromberg, Stockholm University; and Yanhui Wu, University of Southern California
Social Media, Information Networks, and Protests in China
Qin, Stromberg, and Wu study whether the explosive growth of social media in China affects the spread and incidence of protests. They combine a unique dataset of 13.2 billion microblog posts published during 2009-2013 with detailed information on thousands of protests and strikes during 2006-2017. They use retweets by users in one city of blogposts from users in other cities to construct a network of social media information flow across cities. Exploiting the rapid expansion of network which generates time-series variation in information flow, Qin, Stromberg, and Wu develop a novel difference-in-difference methodology to estimate the effect of network interactions. Despite the strict media control in China and the lack of information for explicit coordination, the researchers find that information diffusion over the social media network has a sizeable and significant effect on the spread of both protests and strikes. The spread of events caused by information flow over social media is fast and predominantly local between events within the same category (e.g., cause and industry); event spread across categories is still significant, albeit weaker. Furthermore, Qin, Stromberg, and Wu find that social media networks increase the incidence of protests and strikes. These findings shed light on the recent debate regarding the political role of social media in autocracies.
Panle Jia Barwick and Shanjun Li, Cornell University and NBER; Liguo Lin, Shanghai University of Finance and Economics; and Eric Zou, Cornell University
From Fog to Smog: The Value of Pollution Information
During 2013-2014, China launched a nation-wide real-time air quality monitoring and disclosure program, a watershed moment in the history of its environmental regulations. Barwick, Li, Lin, and Zou present the first empirical analysis of this natural experiment by exploiting its staggered introduction across cities. The program has transformed the landscape of China's environmental protection, substantially expanded public access to pollution information, and dramatically increased households' awareness about pollution issues. These transformations in turn triggered a cascade of behavioral changes in household activities such as online searches, day-to-day shopping, and housing demand when pollution was elevated. As a result, air pollution's mortality cost was reduced by nearly 7% post program, amounting to an annual benefit of RMB 120 billion. The resulting benefit is an order of magnitude larger than the cost of the program and the associated avoidance behavior. Barwick, Li, Lin, and Zou's findings highlight considerable benefits from improving access to pollution information in developing countries, many of which are experiencing the world's worst air pollution but do not systematically collect or disseminate pollution information.
Yi Huang, The Graduate Institute, Geneva; Chen Lin, University of Hong Kong; Sibo Liu, Lingnan University; and Heiwai Tang, Johns Hopkins University
Trade Networks and Firm Value: Evidence from the US-China Trade War
Huang, Lin, Liu, and Tang evaluate the financial implications of policy shocks on global production networks. They exploit various announcements of tariff hikes across a wide range of goods by both the U.S. and Chinese governments in 2018-2019 as events, starting with the presidential referendum issued by the Trump administration on 22 March 2018, to study the impact of trade policy shocks on firms' stock market performance. Using various novel datasets, they document significant heterogeneous responses by firms to the announcements, depending on their direct and indirect exposure through global value chains to U.S.-China trade. In particular, U.S. firms that are more dependent on exports to and imports from China have lower stock returns and higher default risks around the announcement dates, while reduced import competition from China plays a limited role. Consistent patterns of stock price reactions are also found among Chinese firms. Two reverse experiments in 2019 further validate how the complex structure of global trade determines firms' stock market reactions to policy shocks.