April 25-26, 2014
Siqi Zheng and Weizeng Sun, Tsinghua University, and Matthew Kahn, University of California at Los Angeles and NBER
Over the last decade, China's home prices have soared. Young people, especially young men, continue to want to buy homes and must choose whether and when and where to buy. Because of fundamental uncertainty about one's labor income path, future real estate price growth, and government policy, potential real estate buyers have an incentive to seek out Internet information about evolving market sentiment. Following recent U.S. literature, Zheng, Sun, and Kahn build a 35-Chinese-city real estate sentiment index that measures the degree of optimism in a local market at a point in time. All else equal, this index predicts several important real estate phenomena, and its effects differ depending on local demand-side and supply-side conditions. The authors' findings suggest that this sentiment index proxies for a time-varying housing demand shifter. They use a household expectations survey covering seven cities to further explore the underpinnings of the empirical relationships they document.
Trevor Tombe, University of Calgary, and Xiaodong Zhu, University of Toronto
International trade and the internal movement of goods and people are closely related. Increasingly open and with massive internal migration flows, China provides an ideal setting to study these interrelationships. Tombe and Zhu develop a general equilibrium model of internal and external trade with migration, featuring both trade and migration frictions. Using unique province-level data on internal and external trade, and recent micro-census data on internal migration, the authors estimate international and internal trade costs and internal migration costs. They find all these costs declined substantially after China joined the World Trade Organization (WTO). The authors use the model to quantify and decompose the effects of liberalizing trade (international and internal) and relaxing internal migration restrictions on China's aggregate welfare, internal migration, and regional income differences. They find the external trade liberalization has a large impact on China's trade-to-GDP ratio, but modestly increases aggregate welfare while increasing regional income differences. In contrast, reducing internal trade costs generates larger welfare gains and reduces regional income differences. While both increase migration flows, migration cost reductions are substantially more important for migration. More surprisingly, lower migration costs only modestly increase aggregate welfare, but substantially decrease regional income differences. The authors' results suggest that internal market liberalization is much more important than the external trade liberalization as a source of China's post-WTO improvement in aggregate welfare and reduction in regional income inequality.
Hui He, Feng Huang, and Dongming Zhu, Shanghai University of Finance and Economics, and Zheng Liu, Federal Reserve Bank of San Francisco
He, Huang, Liu, and Zhu use China's large-scale reform of state-owned enterprises (SOEs) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary saving for wealth accumulation. Before the reform, SOE workers enjoyed job security similar to that of government employees. Since the reform, more than 35 million SOE workers have been laid off, while government employees kept their iron rice bowl. The change in unemployment risk for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps the authors estimate the importance of precautionary saving. In their estimation, the authors correct a self-selection bias in occupational choice and disentangle the effects of uncertainty from a pessimistic outlook. They find that precautionary savings account for at least 30 percent of the wealth accumulation for SOE workers between 1995 and 2002.
Xue Bai, Pennsylvania State University; Kala Krishna, Pennsylvania State University and NBER; and Hong Ma, Tsinghua University
Firms can choose how they export: directly or through intermediaries. What are the costs and benefits of such choices? Firms may choose to trade directly, even if this is more costly in the short run, if doing so results in better future outcomes. A policy pursued by China provides a unique chance to look at such tradeoffs in the real world. Before China's accession to the World Trade Organization, a large share of domestic Chinese firms were not allowed to export directly, but only through intermediaries. These restrictions on direct trading may have been a double-edged sword: while firms may have been spared the costs of direct exporting, they may also have been barred from obtaining any benefits of doing so. Bai, Krishna, and Ma use frontier techniques to estimate a structural dynamic model and use it to evaluate the consequences of removing restrictions on direct trading, a major policy reform in China. They develop and estimate a dynamic discrete choice model where firms choose their export mode. The authors recover not only the sunk and fixed costs of exporting according to mode, but also the evolution of productivity and demand under different export modes. They find that the evolution of both demand and productivity is relatively positive under direct exporting. However, on average, starting direct exporting requires significantly higher start-up costs than starting indirect exporting. It is also more costly to remain a direct exporter than to remain an indirect one. Moreover, climbing the export ladder by starting off as an indirect exporter and then transitioning into direct exporting is cheaper than exporting directly to begin with. The authors' counterfactual experiment suggests that these restrictions on direct trading reduced Chinese export growth considerably. Exports would have been 30 percent less and the export participation rate would have been 37 percent lower had there been no liberalization of trading rights. In addition, the authors compare the effects of different trade policies, namely export subsidies and subsidies on export costs. For export subsidies, targeting direct exporters over indirect ones increases the number of exporters and exports per dollar expended. However, for cost subsidies, the opposite is true.
Shang-Jin Wei; Ziru Wei, Tsinghua University; and Jianhuan Xu, New York University
Wei, Wei, and Xu aim to provide the first structural-estimation-based assessment of an influential hypothesis in the international trade literature that export pioneering activities are prone to market failure. They point out that the existence of positive discovery costs incurred by an export pioneer and the existence of spillover from the pioneer to follower firms are necessary but not sufficient conditions for market failure. Market failure also requires two inequalities to hold simultaneously: the discovery cost must be greater than any individual firm's expected profit but smaller than the sum of all potential exporters' expected profits. Neither inequality has to hold necessarily in the data. The authors use structurally estimated parameters based on the micro customs data of Chinese electronics exports to assess the empirical plausibility of market failure. Although there is evidence of positive discovery costs and spillovers, they find that market failure is not a high likelihood event in practice.
Myrto Kalouptsidi, Princeton University and NBER
Kalouptsidi provides a model-based empirical strategy to detect the presence and magnitude of government subsidies, and to quantify their impact on industry prices, production reallocation across countries, and profits. She applies this strategy to world shipbuilding, an industry long thought to be affected by such policies. She constructs a model for the market of new ships, where both demand and supply are dynamic. The author finds strong evidence that China intervened in its shipbuilding industry and reduced shipyard costs by 15 to 20 percent. These production subsidies led to massive reallocation of ship production across the world, with Japan losing significant market share.
Jennifer Carpenter and Fangzhou Lu, New York University, and Robert Whitelaw, New York University and NBER
China is the world's largest investor and greatest contributor to global growth. The success of China's stock market in attracting domestic and international capital and allocating it efficiently to corporate investment will be an important determinant of global growth in the coming decades. Despite its reputation as a casino, Carpenter, Lu, and Whitelaw find that China's stock market has functioned well since the reforms of the last decade. Stock price informativeness has increased and compares favorably with that in the United States. The efficiency of corporate investment is highly correlated with stock price informativeness and has followed a strikingly similar trend. Despite its segmented nature, China's equity market delivers a cross-sectional pattern of returns surprisingly similar to that found in other countries, with high premia for size, value, illiquidity, and right-skewed payoffs. Moreover, China's stock market has performed well, especially its small and medium enterprises. It exhibits low correlation with other equity markets, reflecting restrictions on international capital flows. As a result, China's factor portfolios offer high alphas for U.S. and global investors who can access them. This suggests that liberalizing capital flows would reduce corporate China's cost of capital. While China's stock market is already an important enterprise-financing channel, additional regulatory reforms to improve the information environment and liberalize the flow of capital would further empower this market to attract capital, allocate it efficiently, and support economic growth worldwide.
Wolfgang Keller, University of Colorado-Boulder and NBER, and Carol Shiue, University of Colorado and NBER
Keller and Shiue ask whether the institutions introduced in Chinese Treaty Ports by Western powers from 1842 to 1943 had an impact on capital market development in China as evidenced by interest rates. They estimate annual interest rates for 205 prefectures throughout China over the years 18201911 by measuring carrying costs of grain. The authors find that interest rates in China rose during the 19th century, and were on the whole higher than they were in the 18th century. They also explain that difference-in-differences estimation shows that treaty port institutions lowered interest rates significantly, not only in the immediate vicinity of the treaty ports but more broadly. The magnitude of the decline was about 25 percent.
Hanming Fang, and Quanlin Gu and Li-An Zhou, Peking University
Using a large, unique dataset from the Chinese housing market, Fang, Gu, and Zhou attempt to measure corruption by the price differences paid by bureaucrat buyers and non-bureaucrat buyers in the housing market. They find that the housing price paid by bureaucrat buyers is on average 1.05 percentage points lower than that paid by non-bureaucrat buyers after controlling for a full set of characteristics of buyers, houses, and mortgage loans. More interestingly, they find that the bureaucrat price discounts exhibit interesting gradients with respect to their hierarchical ranks, criticality of their government agencies to real estate developers, and geography. The authors argue that the bureaucrat price discounts and the gradients of these discounts are not likely driven by alternative explanations, thus they are evidence of corruption and measures of the value of power.
Yen-cheng Chang and Bin Zhao, Shanghai Advanced Institute of Finance; Harrison Hong, Princeton University and NBER; and Larissa Tiedens, Stanford Graduate School of Business
An oft-cited premise for why diverse societies, whether ethnically, linguistically, or religiously, can grow faster than homogeneous ones is that they bring about diverse opinions, which foster problem solving and creativity. Chang, Hong, Tiedens, and Zhao provide evidence for this premise using a linguistic measure of diversity across Chinese provinces and stock market measures of diverse opinions. This cross-province variation in linguistic diversity is correlated with the extent of hilly terrain in a province but is uncorrelated with financial development in that province. Households in provinces with more linguistic diversity have more diverse opinions as measured by greater trading of and disagreement about local stocks on stock message boards. Linguistic diversity is also correlated with small private enterprise diversity. An analogous cross-country regression suggests that the authors' conclusion extrapolates beyond China.