Working Group on the Chinese Economy
October 5 and 6, 2012
David Dollar, U.S. Treasury, and Benjamin Jones, Northwestern University and NBER
China presents several macroeconomic patterns that appear inconsistent with standard stylized facts about economic development and hence inconsistent with the standard growth model. Dollar and Jones show that Chinese macroeconomic patterns instead appear consistent with an objective of maximizing output in non-competitive factor markets. In short, China appears to successfully follow the stated output objectives in its five-year plans. The authors consider the micro-institutional features that can sustain this behavior and present a simple model built on these features. The model emphasizes the hukou system and state control over capital allocation, which allow a centralized output-maximizing objective to be effectively decentralized into profit-maximizing firms. The model can explain several puzzling facts about the Chinese economy while also showing how a shift toward a free-market system can initially take the economy further from global macroeconomic norms.
Russell Cooper, Pennsylvania State University and NBER; Guan Gong, Shanghai University of Finance and Economics; and Ping Yan, CCER
Cooper, Gong, and Yan study the employment and productivity implications of new labor regulations in China. These new restrictions are intended to protect workers' employment conditions by, among other things, increasing firing costs and increasing compensation. The authors estimate a model of costly labor adjustment from data prior to the policy and use it to simulate the effects of the policy. They find that increases in severance payments lead to sizable job creation, a significant reduction in labor reallocation, and an increase in the exit rate. A policy of credit market liberalization will reduce employment, slightly increase labor reallocation, and reduce exit. The estimated elasticity of labor demand is about unity, so an increase in the base wage leads to sizable job losses.
Douglas Almond, Columbia University and NBER; Hongbin Li, Tsinghua University; and Shuang Zhang, Cornell University
Almond, Li, and Zhang examine the effect of income growth induced by the 1978-84 land reform on the sex ratio imbalance in China. Using variation in reform timing by county, together with the absence of sex selection among first-born child, they compare the sex of the second child between families with a first girl and those with a first boy, both before and after the reform. The results show that following a first daughter, the second child is 5.5 percent more likely to be a boy after land reform. Better educated parents are substantially more likely to respond with sex selection. After assessing various potential channels, the evidence is most consistent with an effect of increased household income.
Harrison Hong, Princeton University and NBER; Wenxi Jiang, Yale University; and Bin Zhao, Shanghai Advanced Institute of Finance
Hong, Jiang, and Zhao use the rapid rise of a Chinese middle class from 1998-2009 to study the impact of status preferences on risk-taking. They measure the intensity of status concerns by province based on per capita income, luxury brand internet searches, and the male-female sex ratio imbalance. Status preferences -- in the form of "Keeping-up-with-the-Jones" -- lead to a demand for local stocks to track neighbors, which rises with the stock market and generates trading between status and non-status seekers. Using large stocks as a control group, the authors find higher share turnover, price, and sensitivity of turnover to returns for small-relative-to-large stocks in high-status compared to low-status-concern provinces. These difference-in-differences also have increased over the sample period, which is consistent with status concerns increasing risk-taking.
Jing Wu, Tsinghua University; Yongheng Deng and Bernard Yeung, National University of Singapore; Jun Huang, Shanghai University of Finance and Economics; and Randall Morck, University of Alberta and NBER
China, while generating fast economic growth, is also well known for its less than satisfactory environmental records. Using local governments' spending on urban infrastructure as illustration, Wu, Deng, Huang, Morck,and Yeung show empirically that such outcomes can be explained bythe incentives that local governments face. Tangible growth is a dominant consideration for local government leaders' promotion. At the same time, they need fiscal resources to spend on delivering tangible growth. During the years of 2000-9, prefecture officers' spending on urban infrastructure strongly tilts towards transportation. First, the spending significantly boosts local GDP growth. Second, it raises land prices which in turn increases available fiscal revenues that can be spent on bolstering GDP growth. Both effects raise prefecture officers' promotion probability. By contrast, spending on environmental amenities does not share similar effects and even negatively affects the probability of officers' promotion. This explains local governments' low spending on urban environmental amenities, which is at least partly responsible for the current problem of poor urban air quality. This analysis reveals the need to align incentives, responsibilities, and budget constraints for prefecture officers. While the results do not readily suggest sub-optimal resource allocations, they are relevant for China's pursuit for environmental protection, health care, and education, as emphasized in the latest five-year plan.
Lily Fang, INSEAD; Jun Qian, Boston College; and Huiping Zhang, Shanghai University of Finance & Economics
Using a novel, hand-collected dataset of a popular finance TV show and intra-day trading data from China, Fang, Qian, and Zhang compare the trading, liquidity, and returns of on-the-show and off-the-show stocks from the same industry. Employing a difference-in-difference approach, they find that off-the-show stocks experience significantly greater improvement in liquidity with higher trading volume and lower bid-ask spreads after the show. The improvement is attributed mostly to small trades. Both on-the-show and off-the-show stocks experience positive abnormal returns that do not reverse one month after the show, and the return gap between these stocks before the show disappears. There is some evidence that small traders profit more from buying off-the-show stocks than on-the-show stocks after the show. Overall, the evidence suggests that media coverage facilitates price discovery, and that retail investors, as a group, appear to behave rationally and are not as naïve as typically thought in their reaction to news from mass media.
Nicholas Bloom, Stanford University and NBER, and James Liang, John Roberts, and Zhichun (Jenny) Ying, Stanford University
Over 10 percent of U.S. employees now regularly work from home (WFH), but there is widespread skepticism over its impact, as highlighted by phrases like "shirking from home." Bloom, Liang, Roberts, and Ying report the results of a WFH experiment at Ctrip, a 13,000 employee NASDAQ listed Chinese multinational. Call center employees who volunteered to WFH were randomly assigned to work from home or in the office for nine months. Work from home led to a 13 percent performance increase, of which about 9.5 percent is from working more minutes per shift (fewer breaks and sick-days) and 3.5 percent from more calls per minute (attributed to a quieter working environment). Home workers also reported improved work satisfaction and their job attrition rate fell by 50 percent. After the experiment, the firm rolled the program out to all employees, letting them choose home or office working. Interestingly, only half of the volunteer group decided to work at home, with the other half changing their minds in favor of office working. After employees were allowed to choose where to work, the performance impact of WFH more than doubled, highlighting the benefits of choice alongside modern management practices like home working.
Liugang Sheng, University of California, Davis, and Dennis Tao Yang, University of Virginia
Sheng and Yang develop a model to study the joint determination of the ownership structure of offshoring, skill upgrading, and wage inequality in developing countries. Because of the abundance of low-skilled labor and contractual frictions in the South, the skill content of intra-firm offshoring dominates that of arm's length offshoring. As a result, processing trade by foreign owned firms has a greater effect on skill upgrading and the skill premium in developing countries than do joint ventures and indigenous firms. The authors test these theoretical implications with a natural experiment in which China lifted its restrictions on foreign ownership upon its accession to the WTO. Empirical findings using detailed Urban Household Surveys and trade data from Chinese customs provide strong support for the proposed theory, shedding light on the changes in firm ownership structures, the skill content of exports, and the evolution of wage inequality over the past two decades in China.
Yongheng Deng, National University of Singapore; Joseph Gyourko, University of Pennsylvania and NBER; and Jing Wu, Tsinghua University
Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, Deng, Gyourko, and Wu estimate standard investment equations that yield no evidence of a collateral channel effect. This is markedly different from previous work on the United States and Japan which finds economically large impacts. One reason for this appears to be that some of the most dominant firms in China are state-owned enterprises (SOEs) which are unconstrained, in the sense that they do not need to rely on rising underlying property collateral values to obtain all the financing necessary to carry out their desired investment programs. However, the authors also find no collateral channel effect for non-SOEs when they perform their analysis on a disaggregated sets of firms. Norms and regulation in the Chinese capital markets and banking sector can explain why there is no collateral channel effect operating among these firms. The authors caution that these results do not mean that there will be no negative fallout from a potential real estate bust on the Chinese economy. There are good reasons to believe there would be, just not through a collateral channel effect.
Daniel Berkowitz, University of Pittsburgh; Chen Lin, Chinese University of Hong Kong; and Yue Ma, Lingnan University
Using the 2007 China Property law as a natural experiment, Berkowitz, Lin, and Ma explore the implications of property rights protections for corporate finance and for investment. The law enabled business owners to use more of their assets for securing external finance and allowed creditors to recover a larger share of their secured assets in the event of a default. Moreover, the law lowered the threat faced by business owners that the government would expropriate their collateralized assets. Because the law strengthened fundamental property rights protections, in theory it should have eased a firm's access to external finance and improved firm investment and, as a consequence, enhanced firm value. Using a balanced panel of roughly 700 private listed Chinese firms, the authors find that firm-level investment, debt finance, and value substantially increased after the enactment of the law. Moreover, after the passage of the law, investment increased more strongly with Q and depended less on cash flow, and external finance increased more strongly with Q. These effects were more profound for firms that did not have political connections and that had a large stock of tangible assets, suggesting that the property law made political connections less important and made tangible assets more important to firms as sources of collateral for external finance and for investment. Consistent with these findings, the authors conclude that the property law had a strong announcement effect. Specifically, firms with higher Q and higher tangibility, and firms without political connections, had higher cumulative abnormal returns around the time when the law was announced.
Raymond Fisman, Columbia University and NBER, and Yasushi Hamao and Yongxiang Wang, University of Southern California
Fisman, Hamao, and Wang study the impact of cultural aversion on international economic relations by analyzing market reaction to adverse shocks to Sino-Japanese relations in 2005 and 2010. Japanese companies with high China exposure decline disproportionately during each event window; Chinese companies with high Japanese exports similarly suffer relative declines. The effect on Japanese companies is concentrated in industries that compete with Chinese state-owned enterprises, while the negative impact on Chinese firms is primarily for consumer-focused companies. These results suggest an important impact of cultural frictions on economic relations, and highlight that institutional context is important for understanding the mechanisms underlying this effect.