Chinese Economy

The NBER's Working Group on Chinese Economy met in Cambridge on March 2-3. Faculty Research Fellow Nancy Qian of Northwestern University; Woring Group Director Shang-Jin Wei of Columbia University; and Research Associate Daniel Xu of Duke University organized the meeting. These researchers' papers were presented and discussed:

Harald Hau, University of Geneva; Yi Huang, The Graduate Institute, Geneva; and Hongzhe Shan, Swiss Finance Institute

TechFin at Ant Financial: Credit Market Completion and its Growth Effect

Ant Financial provides automated credit lines to more than a million firms trading on Alibaba's Taobao e-commerce platform. Monthly credit records show how TechFin mitigates local credit supply friction in China's segmented credit market and extends the "frontier" of credit availability to firms with a low credit score. Hau, Huang, and Shan use a discontinuity in the credit decision algorithm to document that a firm’s credit approval and first-time online credit use boosts firm development in terms of sales and transaction growth. These findings reveal the scope of China's credit market frictions.

Panle Jia Barwick, Cornell University and NBER; Dave Donaldson, MIT and NBER; Shanjun Li, Cornell University and NBER; and Yatang Lin, Hong Kong University of Science and Technology

The Welfare Effects of Passenger Transportation Infrastructure: Evidence from China

Barwick, Donaldson, Li, and Lin develop an empirical framework to evaluate the welfare impacts of passenger transportation infrastructure and apply it to China's High-Speed Railway (HSR) network, one of the largest infrastructure projects in the world. The framework is a three-layer CES model that characterizes transportation mode choices (the inner nest), consumption and trip choices (the middle nest), and spending across cities (the outer nest). The researchers estimate the model parameters by leveraging the universe of Chinese consumers' credit and debit card transactions with detailed information on travel costs across different modes of transportation over time. Their analysis shows that a direct HSR connection between two cities leads to a sizeable increase in the number of bilateral trips and bilateral transaction value. The model estimates imply that removing the entire HSR network would lead to a large reduction in welfare gains from out-of-city consumption and trips.

Yuyu Chen, Peking University, and David Yufan Yang, Stanford University

The Impact of Media Censorship: Evidence from a Field Experiment in China

Media censorship is a hallmark of authoritarian regimes. Chen and Yang conduct a field experiment in China to measure the effects of providing citizens with access to an uncensored Internet. They track subjects' media consumption, beliefs regarding the media, economic beliefs, political attitudes, and behaviors over 18 months. They find four main results: (i) free access alone does not induce subjects to acquire politically sensitive information, (ii) temporary encouragement leads to a persistent increase in acquisition, indicating that demand is not permanently low, (iii) acquisition brings broad, substantial, and persistent changes to knowledge, beliefs, attitudes, and intended behaviors, and (iv) social transmission of information is statistically significant but small in magnitude. The researchers calibrate a simple model to show that the combination of low demand for uncensored information and the moderate social transmission means China's censorship apparatus may remain robust to a large number of citizens receiving access to an uncensored Internet.

Hanwei Huang, London School of Economics

Germs, Roads and Trade: Theory and Evidence on the Value of Diversification in Global Sourcing

Huang studies the value of diversification in global sourcing in improving firms' resilience to supply chain disruptions. They build a model in which firms select into importing from countries and via customs with different efficiencies, taking into account domestic and international trade costs. The model predicts that high productivity firms are more geographically diversified in sourcing under input complementarity, which makes them more resilient to adverse shocks on the supply chain than low productivity firms. Reductions in trade costs induce firms to further diversify their sourcing strategies. Huang then exploits the 2003 SARS epidemic as a natural experiment to examine the resilience of Chinese manufacturing importers. Firm imports fell by 7.9% on average when the trade route was hit by SARS, but as much as 52% for firms without any diversification. The disruptions led to smaller increases in marginal cost for firms with more trade routes for imports. The epidemic reduced total Chinese manufacturing outputs by about 0.7% at its peak. Connectivity to roads increased firms' resilience to the epidemic by facilitating input diversification.

Hui He, International Monetary Fund; Lei Ning, Shanghai University of Finance and Economics; and Dongming Zhu, Shanghai University of Finance and Economics

The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply: The Case of China

He, Ning, and Zhu study, both empirically and quantitatively, the role of savings and the labor supply in self-insurance channels over the life cycle when one faces not only idiosyncratic income risks, but also changes in longevity risk and pension benefits. They pick China as a case study since over the past two decades China has undergone a dramatic process of rapid aging and a tremendous reduction in social security benefits. They find that both savings and the labor supply are quantitatively important self-insurance channels in responding to changes in longevity risk and pension benefits, and the responses via adjustment to savings and labor supply have significant macroeconomic implications. Applying the model to China, the researchers find that the pension reform and rapid aging together contribute 55% of the increase in the household saving rate from 1995 to 2009, and they jointly capture about 64% of the drastic increase in the labor supply for the same period.

Koichiro Ito, University of Chicago and NBER, and Shuang Zhang, University of Colorado Boulder

Do Consumers Distinguish Marginal Cost from Fixed Cost? Evidence from Heating Price Reform in China

A central assumption in economics is that consumers distinguish marginal cost from fixed cost. Ito and Zhang empirically tests this assumption by using a quasi-experiment in heating price reform in China. The introduction of a two-part tariff created policy-induced variation in the marginal cost and the fixed cost, and staggered policy implementation by building allows the researchers to develop an event-study research design. Using administrative records on daily household level heating usage over ten years, they find strong evidence that consumers distinguish marginal cost from fixed cost in a way that is consistent with standard economic theory. Consequently, the policy provided intended social welfare gains from allocative efficiency and environmental externalities. The researchers findings provide important implications for energy policy because a growing number of developing countries including China are in the process of implementing consumption based energy billing in lieu of pre-existing inefficient fixed-charge billing.

Shang-Jin Wei, Columbia University and NBER; Jianhuan Xu, Singapore Management University; and Jungho Lee, Singapore Management University

Trade Imbalance as a Source of Comparative Disadvantage: Why Does China Import So Much Waste?

Recognizing that trade imbalance can generate a difference in the unit shipping cost, Wei, Xu, and Lee propose a model in which countries with a large trade surplus (deficit) tend to systematically import (export) more of goods that are heavy relative to their value. They report cross-country evidence consistent with this prediction. A particular example of goods that are relatively heavy is solid industrial waste such as scrap metals and scrap glass. The researchers report evidence that countries with a trade surplus such as China systematically import more of such goods. If pollution externality associated with industrial waste is not properly corrected by a tax, a trade surplus is also translated into more health hazard associated with imported waste.

Guojun He, Hong Kong University of Science and Technology; Shaoda Wang, University of California at Berkeley; and Bing Zhang, Nanjing University

Environmental Regulation and Firm Productivity in China: Estimates from a Regression Discontinuity Design

He, Wang, and Zhang estimate the causal effect of environmental regulation on firm productivity in a regression discontinuity design implicit in China's surface water quality monitoring system. Since water quality readings are important for political evaluation, and such readings can only capture emissions from the upstream, local governments are incentivized to enforce tighter regulations on firms in the immediate upstream of a monitoring station, rather than those in the immediate downstream, despite their spatial adjacency. Exploiting the discontinuity in the regulation stringency across the monitoring stations, the researchers find that upstream polluting firms’ TFP are 27% lower than downstream firms, which corresponds to a 56% difference in COD emissions. These estimates imply that China's COD abatement target between 2016 and 2020 would lead to a roughly one trillion-Yuan loss in total industrial output.

Hanming Fang, University of Pennsylvania and NBER; Zhe Li, Renmin University of China; Nianhang Xu, Renmin University of China; and Hongjun Yan, DePaul University

In the Shadows of Government: Political Turnovers and Firm Perk Expenses

Fang, Li, Xu, and Yan show that following the turnover of the party secretary or mayor of a city in China, firms headquartered in that city significantly increase their "perk spending" (e.g., travel expenses, business entertainment expenses, overseas training expenses, board meeting expenses, company car expenses, and meeting expenses), even after controlling for local economic conditions. Using the age and tenure of incumbents as instruments, the researchers evidence supports the interpretation that firms increase their perk spending to build up relations with local governments. They also find that the perk expenses increase more when the demand to build relation is stronger (e.g., when the incoming official is young, or from a different city), when the firm is less connected politically (e.g., private firms, or firms whose leadership lacks political experiences). This effect is weaker after the 18th National Congress of the Chinese Communist Party, or after an arrest of local politicians for corruption cases. The researchers' evidence also shows that firms with more perk expenses receive more future benefits, such as government subsidy and access to financing, but do not have better future performances. Finally, local political turnover in a city tends to be followed by changes of chairmen or CEOs of state-owned firms in that city, but only for those controlled by the local government rather than private firms or those controlled by the central government. However, the chairmen or CEOs who have connections with local government officials are less likely to be replaced.

Pierre-André Chiappori, University of Chicago; David Ong, Peking University; Yu Yang, University of Wisconsin, Madison; and Junsen Zhang, Chinese University of Hong Kong

Marrying Up: Trading off Spousal Income and Spousal Height

Couple's heights tend to match. However, whether such matching is for the sake of height or the many desirable traits associated with stature (e.g., income) is unclear. Chiappori, Ong, Yang, and Zhang contribute to this literature by randomly assigning heights and incomes to 360 unique artificial profiles on a major online dating website in China. They then recorded nearly 800 "visits"-- clicks on abbreviated profiles, which include height and income information, from search engine results. Supporting the preference basis for assortative matching on height, taller men preferred taller women. Men were indifferent to women's incomes, but women preferred higher income men. Surprisingly, instead of finding that women also have assertive preference for mate height, women's willingness to trade mate height for mate income (marginal rate of substitution--MRS for height) form a U-shaped frontier on their own heights. For short and medium men, a small increase in height makes them much more attractive to short women, a moderate difference for medium, and a negligible difference for tall women. However, for tall men, the reverse ranking of MRSs among women. The researchers confirm these finding with CFPS survey data of married couples using Chiappori et al.'s (2012) method for multidimensional matching, which they extend to heterogeneity across women of different heights by combining new theory with Vella (1993) instrumental variable approach. The MRS of short wives is significantly higher than medium, but not significantly higher than tall. Short early mothers drive the difference. Only the earliness of their marriages and childbirth increase on husband's height. The researchers' evidence suggests that short women are matching non-assortatively, and that, to increase the height of their children.

Loren Brandt, University of Toronto; Gueorgui Kambourov, University of Toronto; and Kjetil Storesletten, University of Oslo

Barriers to Entry and Regional Economic Growth in China

The non-state manufacturing sector has been the engine of China's economic transformation. Up through the mid-1990s, the sector exhibited large regional differences, subsequently Brandt, Kambourov, and Storesletten observe rapid convergence in terms of new firm start-up rates, productivity, and wages. To analyze the drivers of this behavior, they construct a Melitz (2003) model that incorporates location-specific capital wedges, output wedges, and a novel entry barrier. Using Chinese Industry Census data for 1995, 2004, and 2008, they estimate these wedges and examine their role in explaining differences in performance across prefectures and over time. Entry barriers turn out to be the salient friction for explaining performance differences. The researchers investigate the empirical covariates of these entry barriers and find that barriers are causally related to the size of the state sector. Thus, the downsizing of the state sector after 1997 may be important in explaining the rapid manufacturing growth over the 1995-2008 period.

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