| Economic Research Journal (Monthly) Vol.54 No.5 May, 2019 |
| • The Dynamic Energy Conversion of China’s Foreign Trade and the Formation of New International Competitive Advantages |
Summary： In recent years, three bright spots have emerged in China’s foreign trade. First, cross-border e-commerce transactions have grown dramatically. In 2018, China’s cross-border e-commerce transactions amounted to 7.9 trillion yuan, an increase of 25% over the previous year. Total retail import and export commodities that passed through the customs cross-border e-commerce management platform increased by 50% over the same period. Second, the rapid growth of China Railway Express has continued, with 6,300 China-Europe freight train trips made in 2018 alone—a 72% increase over 2017. The third bright spot is the China Free Trade Zone, where nearly 600,000 new enterprises were set up in the first half of 2018, with obvious agglomeration effects.
Based on these trends, this paper explores China’s new competitive advantages on the global stage from three perspectives. First, it analyzes the role of the Internet and cross-border e-commerce in remaking the economic structure, specifically through cost reduction effects, the transformation of the value chain, and the promotion of services trade. Second, considering the central role of China Railway Express in China’s Belt and Road initiative, this paper analyzes the freight operator’s comprehensive distribution function and the reconstruction of its global value chain. Third, regarding the China Free Trade Zone, this paper analyzes the superposition effects of experimental, institutional, and agglomerative advantages.
China’s new competitive advantages in foreign trade have begun to take shape, as manifested mainly in the following three ways. First, the Internet and cross-border e-commerce challenge the basic hypothesis of the new-new trade theory, namely that enterprise heterogeneity is mainly reflected in enterprise productivity. Heterogeneous consumption preferences create a market environment in which comparative advantages in SMEs’ cross-border e-commerce can form. The Internet and cross-border e-commerce have profoundly changed the division of labor, organizational structure, and micro-subjects in the global value chain, improved the tradability of services, promoted the deep integration of manufacturing and service industries, and provided China an opportunity to leap toward the high end of the global value chain. Second, the operation of China Railway Express has reshaped the traditional theory of world maritime trade, redrawn the economic geography of international trade, changed the economic model of coastal ports, expanded the economic scope of international land ports, accelerated the pace of China’s opening to the West, and led to the gradual realization of “two-way circulation” in the East-West integrated global value chain. Third, the China Free Trade Zone’s experimental advantages, new factor endowment advantages, and institutional advantages overlap, leading to the emergence of composite comparative advantages. In addition, the construction of free-trade ports will further enhance these dynamic comparative advantages.
Previous studies on China’s emerging competitive advantages tend to adopt a single-dimensional perspective and lack a strong theoretical basis, and researchers have inconsistent views. Some scholars even believe that China will fall into the so-called “comparative advantage trap”, and do not identify the true nature of China’s emerging economic potential. To fill this gap, the present paper systematically summarizes three sources of China’s new competitive advantages on the world stage and presents a theoretical basis to support them. First, the Internet and cross-border e-commerce have changed the basic theory of traditional international trade and made it possible for SMEs to enter the international market. Second, China Railway Express has reshaped the theoretical paradigm of maritime trade, as the birth and development of China Railway Express has disrupted the traditional pattern of international trade. Third, the composite comparative advantages of China Free Trade Zone have begun to take shape. These comparative advantages are not independent but rather display a linkage effect.
Keywords： Internet and Cross-border E-commerce; China Railway Express; China Free Trade Zone; Composite Comparative Advantage
JEL Classification： F10, P33 |
| …………………………PEI Changhong and LIU Bin (4) |
| • On Why and How to Borrow from Western Economics in Building a Political Economy of Socialism with Chinese Characteristics |
Summary： President XI Jinping gave China’s economic policy players the historical task of building and continuously improving a political economy of socialism with Chinese characteristics. He described the path toward realizing such an economy as follows: “To uphold and develop a political economy of socialism with Chinese characteristics, we should take the Marxist political economy as a guide, summarizing and refining the great practical experience from China’s reform and opening up, while drawing on beneficial elements from Western economics”. In this paper, we mainly study why and how to borrow from Western economics.
Western economics came into being with the rise of the capitalist market economy. In the 18th and 19th centuries, Western economics mainly focused on topics such as value or price determination; the production, distribution, and consumption of commodities; and the growth of wealth. It also underpinned the rationality of the capitalist system. Since the 1930s, mainstream Western economics has generally not dealt with the capitalist system itself but rather addressed a series of general problems in the market economy such as price, resource allocation, economic fluctuations, and economic growth. Many outcomes of such research are of use to China’s still-unfolding socialist market economy and socialist economics.
Western economics has answered some basic questions, including what to produce, how to produce, for whom to produce, and how to develop. Marxist political economics, meanwhile, mainly reveals capitalist systems’ essential characteristics and laws of development. To build a socialist political economy with Chinese characteristics, it is necessary not only to establish a theoretical foundation for a basic socialist economic system but also to study the same set of general issues in the context of a socialist market economy.
Mainstream Western economic theory seeks to demonstrate the effectiveness and superiority of market mechanisms and to reveal the laws governing a market economy. Marx and Engels conceived that a socialist economy could develop in a planned and proportional manner with government control and allocation of resources. The innovation of DENG Xiaoping was to propose that planning and market forces are both means of controlling economic activity; this provided a theoretical basis for integrating the socialist system and the market economy. One of the objectives of China’s economic reconstructing is to give full play to the decisive role of market mechanisms in resource allocation, while also allowing the government to play a better role; thus, how best to match the market with the government is an important question. This paper holds that in China’s future socialist market economy, the relationship between the market and the government should be a dual-effect integration model with both an efficient market and an efficient government. To achieve this dual-effect integration, we must encourage a two-way reform, promoting both market-oriented reform and government reform.
Western economic theories can be divided into political economic theory, mainstream economic theory, and basic economic theory. By subjecting these to what we term “elimination”, “transformation”, and “transplantation” techniques, respectively, we can absorb and accommodate their beneficial elements in building a political economy of socialism with Chinese characteristics.
Such an economy, at this stage, is a new seedling in the economic garden, with the Marxist political economy as its seed gene. It takes root and grows in the fertile soil of China’s socialist market economy, absorbing nutrition from China’s reform and opening up and modernization drive. In addition, it is an open system, actively absorbing historical and foreign nutrients to aid its growth.
Keywords： Chinese Socialist Political Economy; Western Economics; Beneficial Elements
JEL Classification： P26, P20, B51 |
| …………………………FANG Fuqian (16) |
| • Income Uncertainty, Asset Allocation and Monetary Policy |
Summary： Over the past decade, the Chinese economy has experienced an economic slowdown associated with a surge in economic uncertainty. How does the uncertainty affect individuals’ economic decisions as well as the real economy? What type of monetary policy can stabilize the disturbances caused by uncertainty? How can household consumption and real investment be stimulated under these circumstances? To answer these questions, this paper introduces household income uncertainty into a macroeconomic framework and quantitatively evaluates the stabilization effect of monetary policy.
Empirical evidence from Chinese household survey data suggests that since the 1980s, household income uncertainty has seen a large and sustained increase, and the higher uncertainty affects not only consumption and savings behaviors but also the allocation of savings. This paper incorporates a heterogeneous household model into a standard new Keynesian dynamic stochastic general equilibrium framework. During each period, households’ disposable income is facing an idiosyncratic income shock, which is i.i.d. distributed across households and over time. We further assume that the volatility of income shocks is time-varying, meaning that it is an income uncertainty shock. To characterize households’ asset allocation decisions, we introduce risk-free bonds, liquid monetary assets, and risky assets used in production. To model the demand for liquid assets, we follow Wen (2015) in assuming that households are subject to liquidity constraints, which is modeled as a non-negative constraint on money holdings. Due to the income uncertainty, households with higher income tend to hold more monetary assets even though these assets bear little interest. Thus, the money modeling approach of our paper largely deviates from those in the standard monetary literature.
Theoretical analysis proves that when income uncertainty increases, households face larger risks of liquidity shortages, leading households to hold more monetary assets to smooth the future consumption path. This precautionary demand for money further shrinks consumption expenditures. Indeed, the increased demand for money reflects a larger liquidity premium of holding money. The no-arbitrage condition between the money and bond markets indicates that nominal interest increases as well. As a result, larger demand for liquid assets (money) crowds out investment in physical capital as well as aggregate investment. The weakened aggregate demand leads to deflation in the goods market, which further dampens the firm-side demand for production capital. Eventually, due to the large reductions in both capital demand and supply, the aggregate investment in physical capital declines. Given the above, household-level portfolio decisions provide a crucial transmission mechanism for income uncertainty shocks.
Based on Chinese quarterly data, we estimate the baseline model and identify income uncertainty shocks through a Bayesian approach. We then conduct quantitative analysis based on the estimated model. The results show that income uncertainty shocks cause large aggregate fluctuations in the Chinese economy, which account for approximately 45% of the fluctuations in output and investment. Through the Kalman smoothing technique, we extract the unobserved income uncertainty series. The time series closely tracks important events in the Chinese economy. The above findings suggest that economic uncertainty is an important driving force for Chinese business cycles.
To quantitatively evaluate the stabilization effect of monetary policy, we compare the quantity rule that uses the growth of money injections as an instrument with the price rule that uses the interest rate as an instrument. The impulse responses indicate that the aggregate fluctuation caused by income uncertainty shocks can effectively be stabilized under the price rule, because that rule directly controls the capital price and curbs the increase in the liquidity premium through the nominal interest rate. As a consequence, the crowding-out effect from the money market can largely be mitigated. Therefore, our analysis suggests that during “new norm” episodes of high economic uncertainty, a monetary policy that makes use of the interest rate rule is more efficient in terms of stabilizing the aggregate fluctuations.
Keywords： Income Uncertainty; Asset Allocation; Monetary Policy; Heterogeneous-agent Model; New Keynesian DSGE
JEL Classification： E12, E44, E52 |
| …………………………XU Zhiwei and LIU Jianfeng (30) |
| • What Underlies the Interest Rates of P2P Lending? |
Summary： China has the largest P2P lending market in the world. At the end of 2017, there were 2,249 P2P platforms operating and outstanding P2P loans amounting to approximately 1.04 trillion CNY (around 150 billion USD). The Chinese P2P lending market provides an alternative funding source for many individuals and SMEs that are underserved by the traditional banking system. It also offers a new investment tool for households to allocate their wealth. However, along with its large size, the P2P lending market in China is risky. As of the end of 2017, 65% of P2P platforms that had ever operated had shut down. Many of these platforms had been found to engage in fraud, such as Ponzi schemes. Defunct platforms can incur huge losses for their investors and undermine the stability of the financial system and society.
Understanding defunct platform risk is important for both P2P investors and regulators. First, P2P investors who understand this risk will make better investment decisions. The possibility of a platform going defunct is the primary risk facing P2P investors. In contrast, the default of a single loan causes them little loss, given that nearly all P2P platforms in China adopt a principal guarantee: when a borrower defaults on his/her loan, the platforms return the principal (or both principal and interest) of the investment to investors. Hence, P2P investors suffer a loss only when the platforms go defunct. Second, understanding this risk can help regulators by improving their ability to intervene early, reducing the likelihood of systemic risk and negative effects on society.
We examine the cross-sectional relation between interest rates offered to investors and defunct platform risk. We focus on interest rates for two reasons. First, they play a central role in P2P lending: interest rates are highly related to the investment return of investors and the borrowing cost of borrowers. Many platforms mark the interest rates of their loans on the home page of their websites to attract more investors, while industry third parties often list the average interest rates of each platform for visitors’ convenience. Second, interest rates can have complex relationships with defunct platform risk. On the one hand, low-risk platforms are motivated to set higher interest rates to signal their good financial situation and capability of offering principal guarantees. Hence, interest rates can be negatively related to defunct risk. On the other hand, platforms can have moral hazard problems such as engaging in Ponzi schemes. The existence of moral hazard implies that interest rates can be positively related to defunct risk (Karlan & Zinmman, 2009).
We use a unique dataset for empirical testing. The dataset contains platform-week-level transaction data of 1,415 P2P platforms, including average interest rates, average maturity, and the number of investors of P2P loans transacted on a given platform in a given week. We hand-collect these platforms’ basic information, including registered capital, whether the platform is defunct, the date it became defunct, and the platform’s location. To the best of our knowledge, we are using the most comprehensive data available on the Chinese P2P market.
We perform Probit regressions with week fixed effects to examine the cross-sectional relationship between interest rates and defunct risk. We find that, in general, interest rates are positively related to defunct risk. We also show heterogenous effects across different interest rate levels. For platforms with interest rates in the lowest quartile of the industry, interest rates negatively correlate with defunct risk. For platforms in the second and third interest rate quartiles, interest rates are not significantly correlated to defunct risk. In the highest quartile of interest rates, interest rates are positively related to defunct risk.
Our study contributes to the literature on P2P lending. Earlier studies primarily look at how loan characteristics are related to the default risk of P2P loans. Researchers find that the trust (Duarte et al., 2012), race (Pope & Sydnor, 2011), social networks (Lin et al., 2013), and linguistic features (Gao et al., 2018) of borrowers are related to default risk. Our research extends this literature by examining whether average interest rates are related to platform-level risk in P2P lending.
Keywords： Interest Rate; Platform Defunct Risk; The Chinese P2P Lending Market
JEL Classification： G11, G21 |
| …………………………XIANG Hongyu, WANG Zhengwei, JIANG Jinglin and LIAO Li (47) |
| • Effective Measurement and Nonlinear Contagion of Extreme Financial Risk |
Summary： Preventing the cross-sectoral transmission of systemic financial risks is a strategic challenge with implications for China's overall economic and social development. It is thus important to measure extreme risk accurately and examine the impacts of extreme across-markets risk and China's economic policy uncertainty. Doing so will help us not only curb risk contagion, but also help develop a systemic financial risk measurement system, improve the regulatory framework's double pillars of “monetary policy and macro-prudential policy”, and provide an appropriate reference for theoretically and empirically analyzing financial system supervision in China.
The literature on systemic risk seldom discusses the contagion of extreme risks across financial sectors. As a result, the risk spillover effect in the financial system may not be measured correctly (Hautsch et al., 2014). Research on cross-sectoral risk contagion tends to focus on the effects within traditional financial sectors rather than the contagion between these sectors and the real estate sector. Moreover, studies often use the traditional VaR index to measure the tail risk of an individual institution. However, the expected shortfall (ES) index, which is more sensitive to tail risk, better describes extreme risks (Kratz et al., 2018). Moreover, existing studies pay little attention to the co-movement between the economic policy uncertainty (EPU) index, along with its policy-specific indices, and extreme risks in China's financial market. Finally, most methods commonly used are based on a linear framework (Brana et al., 2018), but ignoring non-linear traits may tend to bias conclusions. (De Vita et al., 2018).
In this study, we use the ES index to measure the extreme risks of the A-share stock market and five financial sectors in China: banks, securities, insurance, diversified financials, and real estate. In addition, we apply the newly developed backtesting method (Du & Escanciano, 2016). Then, from a non-linear perspective, this paper examines the risk features of each sector and the contagion effects among them. Moreover, we use network connectivity measures to more accurately describe the transmission of tail risk. Based on a dynamic view, the rolling estimation method is also used to investigate the gradual evolution of cross-sectoral risk contagion. Finally, we introduce China's EPU index (Baker et al., 2016) and its policy-specific indices (Huang & Luk, 2019) and analyze the co-movement between uncertainty and extreme financial risk by using the nonlinear and mixed-frequency causality test (Ghysels et al., 2016).
The main conclusions of this paper are as follows. (1) The ES index serves as a precise tail risk indicator. The stock market crash in June 2015 and subsequent use of the circuit breaker in January 2016 exposed sectors such as real estate to significant risks, turning these sectors into latent dangers. (2) There is a significant non-linear risk transmission mechanism between different financial sectors. The network connectivity measures show a continuous and stable spread of extreme risks among different sectors and the entire financial system, while the banking and real estate sectors are the main sources of systemic financial risks. In addition, based on dynamic analysis, we show that after the real estate sector came under intensive regulation in 2016, it continued to produce varying degrees of risk contagion to the banking, insurance, and securities industries in the short term. The results also show that extreme risk events sharply increase the banking industry's risk contagion to the securities and insurance sectors. (3) Finally, there is mutual causality between extreme risk in China's stock market and economic policy uncertainty, suggesting that the Chinese stock market is a typically policy-oriented one where unsuitable policies may spawn extreme risks.
The findings of this study have three policy implications. (1) To construct an appropriate measure of systemic risk in China, we need to consider the ES index as an important reference indicator. (2) In regulating the real estate sector, the government should better manage expectations to avoid the excessive volatility associated with inconsistent policies. (3) To avoid the negative effects of bidirectional infection between economic policy uncertainty and extreme risks in China's stock market, economic policies should be consistent.
Keywords： Systemic Financial Risk; Backtesting; Economic Policy Uncertainty; Nonlinear; Mixed-Frequency Causality Test
JEL Classification： C32, G01, G21 |
| …………………………YANG Zihui，CHEN Yutian and CHEN Lixuan (63) |
| • An Evolutionary Analysis of Financial Innovation and Regulation |
Summary： China's financial market has experienced drastic volatility since 2015. Turbulence has affected not only the stock market, which has been depressed for nearly four years, and the bond market, which witnessed a 337% increase in default events in 2017, but also the emerging online-based financial innovation market. For instance, 1,279 peer-to-peer (P2P) lending platforms involving RMB143.4 billion ceased functioning in 2018 alone. Other innovative tools and institutions such as third-party payment, Internet banking, crowdfunding, and cryptocurrencies have also experienced continuous market shocks. To combat the turbulence, China's policy-makers have prioritized risk control. In 2017, President XI Jinping declared that China would “firmly defend the bottom line of systemic financial risks”, naming this the first of “three tough battles” to be fought in the following three years. For implementation, financial regulators, led by the People's Bank of China, have over the past two years strengthened related efforts, including emphasizing regulations on financial innovations. Therefore, how to balance financial innovations and regulations—allowing innovations to continue to develop while mitigating their negative impacts—has become a mutual concern of regulators and general market participants.
Financial innovations and regulations are generally considered opposite sides of the same coin. Financial innovations are developed in an effort to sidestep regulations, while regulators seek to bring these innovative products or institutions back in line through corresponding rule-making. This represents a short-run trade-off, where stricter regulations lead to slower innovation development. In the long run, however, it could serve as a mechanism of mutual promotion if regulators implement proper strategies. Based on the perspective of evolutionary economics and using nonlinear dynamics methodology, we try to identify these proper strategies by separately considering the dynamics of financial innovation diffusion and the dynamics of regulations and then discussing their coevolution.
We choose the Mansfield model to depict the financial innovation diffusion process and assume that regulators set the innovation participation rate as their target and that regulations have a negative impact on innovation diffusion (not development). We then derive the dynamic function of the innovation market participation rate, which is actually a function in the two-dimensional Lotka-Volterra system, with some adjustments to fit our analysis. Then we compare three different regulatory strategies. (1) The independent strategy, whereby regulatory intensity reaches a constant level regardless of the final market participation rate, will not be effective unless a series of restrictive conditions are satisfied. (2) The zero-order regulatory strategy, whereby regulatory intensity adjusts according to the market participation rate, best describes how China's “paternal” regulators are prone to behave. We show, however, that it is generally ineffective, as the market turbulence in recent years corroborates. (3) Finally, in the first-order regulatory strategy, a participation rate target range is preset, and regulatory intensity is changed only when the target is exceeded or not reached. We prove that when such a strategy is used, the coevolution between innovations and regulations leads to an asymptotically stationary point, implying regulators can meet their target. To extend the discussion, we consider the issue of time lags and show that, while the first-order strategy is still the best, a long enough time lag could nullify the strategy's effectiveness. As such, regulations should be carried out promptly. To more closely approximate real-word conditions in China, we examine the coevolution of innovations and regulations under the economic cycle and find that the stationary point now is turned into a Lyapunov stable one; this means the first-order strategy is still effective, although the impact of the economic cycle cannot be avoided.
The conclusions above could be extended and generalized to the relationship between any market participants and policy-makers. An important implication for policy-makers is that the only way to keep a market stable is to closely follow the market and implement a stable, predictable regulatory policy framework.
Keywords： Financial Regulation; Financial Innovation; Co-evolution; Nonlinear Dynamics
JEL Classification： B52, C61, G28 |
| …………………………XU Wenbin, ZHAO Lin and LEE Jevons (81) |
| • Tax Plans and the Corporate Tax Burden |
Summary： Around the world, tax policy is becoming an important tool with which to manage the macro-economy, especially in confronting economic recessions. The central government of China introduced a series of counter-cyclical tax cut policies after the 2008 financial crisis. However, statistics show that tax rates have actually increased at both the macro and micro levels since 2008. In another striking contrast with various tax cut policies, local governments have launched tax plans to guarantee the growth of tax revenue, and tax authorities at all levels have taken corresponding measures to strengthen tax collection. These contradictory phenomena make one wonder what has hindered the implementation of tax cut policies and how local governments have achieved tax growth despite such policies.
For a long time, Chinese tax administrators have used a tax plan management system. A tax plan is a tax revenue target for a given period that a tax authority must collect. Since the tax-sharing system reform in 1994, state provincial tax bureaus' plans are mainly issued by the head office of the State Administration of Taxation (SAT), while local provincial tax bureaus' plans are mainly issued by provincial governments. Both the SAT and local governments have long regarded the achievement of tax plan targets as the main basis for treating tax collection as an issue of overriding importance. The literature investigates why the government intervenes in the corporate tax burden from various perspectives. This paper explores the mechanism of this intervention from the perspective of tax collection by quantifying the pressure on provincial tax authorities to achieve their tax plans.
Analyzing data on the tax plans of provincial tax authorities in China from 2002 to 2012, this paper finds that, on average, 99% of local and 97% of state tax bureaus at the provincial level completed their tax plans. However, as many as 55% of local tax bureaus and 42% of state tax bureaus stated in their annual work reports that they had difficulties achieving their plans. Faced with an economic downturn and shrinking tax sources after the financial crisis, state provincial tax bureaus reduced their tax targets, but those of local tax bureaus increased, causing tax targets to deviate more from tax sources. Meanwhile, tax authorities strengthened inspection to collect more tax revenues and achieve their targets. Using data of listed companies during the same period, this paper examines the impact of tax plans on the corporate tax burden. The regression results show that when tax authorities are under great pressure to achieve their tax plans, tax burdens on firms rise significantly, and this effect intensifies when the tax target growth rate is higher. Moreover, tax inspection increases the tax burdens of non-SOEs significantly, but it has no significant impact on local SOEs. This shows that tax authorities adopt different strategies for firms with different property rights.
To meet the government's goal of ensuring tax growth, tax plans—especially those issued by local governments—may deviate from actual economic tax sources. At the same time, because achieving tax plans represents the “bottom-line” mission of a tax authority, authorities impose excessive taxes on firms and smooth taxes over time. This paper reveals that the tax plan management system born out of the planned economy is what accounts for the marginal impact of the central government's tax cut policies on individual enterprises. Amid the new wave of global tax cuts, merely introducing tax cut policies is far from sufficient to ease the tax burden on enterprises. It is equally important to reform the tax collection system. The integration of the national and local taxation offices would undoubtedly help improve the independence of tax authorities and reduce the intervention of local governments in tax collection.
Given the global and domestic increase in economic uncertainty, a flexible tax plan that can be adjusted according to economic conditions might be preferred. When assessing the performance of tax authorities and their personnel, the government should avoid over-emphasizing the achievement of tax plans and instead put more emphasis on the quality of tax collection.
Keywords： Tax Policy; Tax Plan; Provincial Tax Authority; Corporate Tax Burden
JEL Classification： H20, H32, H71 |
| …………………………BAI Yunxia, TANG Weizheng and LIU Gang (98) |
| • Multiple VAT Tax Rates, Resource Misallocation and Total Factor Production Loss |
Summary： China's value-added tax (VAT) has had the distinctive feature of multiple tax rates since its origin, and the tax rate structure is extremely complicated. Afterthe pilot reform of “replacing business taxes with VAT” started in 2012, there were multiple rates of 17%, 13%, 11%, and 6%, plus levy rates of 5% and 3% etc., along with zero tax and tax exemption. Although the 13% rate was abolished in July 2017 and some rates were lowered in May 2018 and April 2019, the essential structure of multiple tax rates remains. Such a structure leads to the phenomenon of “low levy and high deduction” and “high levy and low deduction” in the VAT deduction chain, which distorts the prices of intermediate inputs, influences the choices of producers and consumers, prevents optimal resource allocation, and ultimately leads to total factor productivity (TFP) losses. This paper addresses the questions of why simplification of the VAT tax rate structure should be pursued and how to achieve it;to that end, we measure the TFP losses caused by multiple tax rates and simulate the actual results of different simplification plans.
Multiple tax rates affect TFP through at least two mechanisms. First, different deduction rates affect the amount of intermediate inputs obtained by enterprises, leading directly to TFP losses (direct effect). Second, the distorted prices of intermediate inputs are transmitted to the capital and product markets, causing distortions in capital and product prices that in turn lead to a decrease in productivity (indirect effect).To verify these two mechanisms, this paper expands the Hsieh & Klenow(2009) (HK) model by adding an intermediate input element to the original labor and capital elements to establish a three-element model, which better fits the basic principles of VAT.Then, numerical simulations and empirical studies are conducted using National Tax Survey Data from 2007 to 2012. Enterprises are selected from the full sample covered by the tax collection and management system using the non-year-on-year stratified isometric sampling method. Tax-related data come directly from the tax collection and management system and can fully and accurately reflect tax payment status.
Four main conclusions are obtained. First, TFP can be increased by about 1.645% per year on average during the sample period by completely eliminating the impact of multiple tax rates. Second, all simplification schemes can lead to productivity gains, but with varying effects. The average effect of a consolidated tax rate of 15% is 1.168%, and that of a consolidated rate of 16% is 1.130%, which are both significantly better than retaining two or three tax rates. Third, the distortions caused by multiple tax rates will be transmitted to the product and capital markets, resulting in average additional efficiency losses of 1.327% and 0.884%, respectively. Fourth, using the 2009 mining industry VAT rate reform as a natural experiment, it is shown that using a tax rate consistent with upstream and downstream industries can reduce distortions and increase TFP. These conclusions have clear policy implications. First, it is necessary to ensure tax neutrality and improve TFP by continuously expanding and improving the VAT deduction chain. Simplifying the tax rate structure and maintaining a uniform tax rate are critical steps in this regard. Second, the tax burden on small-scale taxpayers can be reduced by using a uniform tax rate. Adopting low levy rates will result in tax rate discrimination in the deduction chain and is also not conducive to the improvement of TFP; other policies with fewer negative effects can be considered to support this taxpayer group.
Compared with previous studies, this paper makes several innovative contributions. First,by extending the HK model, it establishes a theoretical framework for understanding resource misallocation and TFP losses stemming from multiple tax rates; this extended model may serve as a useful reference for studies of similar problems. Second, this paper measures TFP losses caused by multiple VAT tax rates and distinguishes direct and indirect effects on TFP. To the best of our knowledge, this is the first paper to explore this issue using industry-wide micro-data. Third, TFP improvements under different tax rate simplification schemes are simulated, and the results are verified by a natural experiment(mining industry VAT rate reform),providing direct implications for VAT reform practice.
Keywords： VAT; Tax Rate Simplification; Resource Allocation; TFP
JEL Classification： D24, H25, O47 |
| …………………………LIU Baihui, KOU Enhui and YANG Longjian (113) |
| • Local Officials’ Turnover and Enterprises’ Overcapacity |
Summary： Excess capacity is a long-standing problem in China's rapid economic development. Curbing overcapacity is high on the government reform agenda, as the government views it as one of the most important tasks in reforming the economic structure. Regarding the drivers of China's overcapacity, market failure and governmental intervention have been put forward as competing explanations.
Rather than taking an industry-wide perspective, this paper investigates the causes of overcapacity at the enterprise level, given the unique relationship between local officials in China (who are fundamentally different from their Western counterparts) and firms. Due to tenure limits or other reasons, local government officials' turnover decisions render the local policy environment uncertain. This affects firms' production and operation behaviors, especially decisions related to output. Accordingly, this paper examines whether the turnover of local government officials reduces or promotes the capacity utilization rate of local firms, and investigates the causes of China's overcapacity at the micro level.
This paper uses data on changes in municipal party secretaries in China, matched with data on Chinese industrial enterprises, to study the effects of local officials' turnover on enterprises' overcapacity. Our empirical results confirm the important influence of local officials on enterprises' overcapacity, showing that turnover aggravates enterprises' overcapacity; enterprises' capacity utilization experiences a significant decline when turnover occurs. The findings are robust when using propensity score matching and a difference-in-differences model, two-stage least squares regression, change regression, and different samples or measures of capacity utilization. Enterprises' overcapacity shows an obvious political cycle that is closely tied to officials' tenures and the Congress of the Communist Party. In addition, enterprises' capacity utilization declines more sharply when newer-appointed secretaries have a local background or are approaching retirement, and the decreases are more significant when the change from the previous secretary happens under abnormal circumstances. Moreover, enterprises' overcapacity is more likely to be driven by political promotion pressures than by the “wave phenomenon”, and local officials can promote the expansion of enterprises' capacity through the allocation of key resources such as taxes, bank loans, and subsidies. Enterprises in non-overcapacity industries are more likely to have excess capacity when facing local official turnover, but policies on cutting overcapacity can restrain enterprises' turnover-associated overcapacity.
This paper makes several contributions to the literature. First, it helps advance our understanding of China's overcapacity through the unique lens of local officials and enterprise overcapacity. Our empirical evidence confirms that local officials can exert significant influence on enterprises' capacity through changes in core leaders who have critical impacts on local economic development and policies. The conclusions of this paper thus enrich the literature on excess capacity and provide micro-level evidence for the explanation of governmental intervention in China's overcapacity. Second, the findings indicate that enterprises' overcapacity exhibits political cycles. Our evidence shows that micro-level overcapacity changes along with officials' tenures and the National Congress of the Communist Party, which reflects the cycles of China's overcapacity. Furthermore, we provide evidence of potentially important mechanisms in the turnover/overcapacity relationship by analyzing the mediating roles of taxes, bank loans, and subsidies. The argument that governmental intervention explains China's overcapacity is based on the notion that intervention into resource allocation decreases the cost of firms' investments; our paper supports this possible channel. Finally, this paper also provides a reference for advancing supply-side structural reforms and tackling overcapacity by promoting governments' and officials' governance.
Keywords： Local Officials' Turnover; Overcapacity; Capacity Utilization; Political Cycle
JEL Classification： D24, G28,G30
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| …………………………XU Yekun and MA Guangyuan (129) |
| • The Historical Roots of Long-term Human Capital Accumulation: Institutional Differences, Confucian Culture Communication and State Capacity Building |
Summary： Among the many factors that determine social and economic development and human progress, the important role played by state capacity cannot be ignored. The long-term influences of state capacity on regional economic development, public goods provision, and government credibility have attracted research attention. In general, the effects of state capacity on long-term regional development are mainly exerted through four mechanisms: regional stability and prosperity, cultural concept shaping, formal institutional norms, and official selection and elite training. However, little is known about the long-term impact of state capacity on human capital accumulation. Exploring this issue is significant because of the central role that human capital plays in the progress of modern civilization and social development.
However, any efforts to understand the long-term impact of state capacity on human capital faces two types of difficulties. First, it requires long-term data, and unfortunately there is a lack of historical data. Second, in empirical analysis, it is difficult to identify the strength of state capacity, given that state capacity within a country is essentially uniform and transnational research cannot guarantee the similarity of other control conditions. However, the Tusi System (TS) that historically existed in China provides us the chance to potentially identify the long-term effect of state capacity differences on human capital accumulation.
The eastern region of Sichuan has been directly controlled by the central government since ancient times. Due to the weak control of the Central Plains dynasties, however, the western region of Sichuan was historically controlled by the TS. For the purpose of our research, this historical fact offers a way to observe the long-term effect of state capacity. We use a manual database of 181 counties in Sichuan to examine the long-term impact of state capacity on human capital. We find that the TS significantly hinders long-term human capital accumulation, and the effect gradually strengthens as the decentralization time increases. The causal inference is still established after investigating omitted variable bias, using the instrumental variable method, and conducting a series of robustness tests. We also analyze the mechanisms of this long-term effect and find that the inheritance of confucian culture and government capacity play an important role in the accumulation of human capital. The above conclusions can help guide the implementation of contemporary policies. In particular, strong state capacity and government construction can be effective in cultivating long-term human capital, thus creating an institutional advantage in terms of educational development. This advantage is reflected not only in the long-term influence of confucian culture and spiritual internalization, but also in the cultivation and construction of government capacity. Therefore, promoting state capacity improvement, enhancing government prestige, and improving government service quality are critical for the development of education and long-term economic growth in China. In addition to promoting the overall progress of economic and educational development, it is important to strengthen the coordination and balance of inter-regional growth, optimize the allocation of educational resources, and create a good environment for personnel training, thus gradually forming a new pattern of human capital cultivation.
The main contributions of this paper are as follows. First, studies on state capacity and human capital—both of which play important roles in societal development and long-term economic growth—are of great value, and this paper fills a research void by examining the long-term impact of state capacity on human capital accumulation. Second, based on an historical perspective, this paper examines the long-term mechanism of human capital-influencing factors. Few previous studies have adopted historical perspectives to examine factors that contribute to the cultivation of human capital. Third, the paper is a useful supplement to the literature on Chinese Tusi. The findings provide a new perspective on Tusi and suggest some avenues for further research.
Keywords： Tusi System; Long-term Human Capital; Confucian Culture; State Capacity
JEL Classification： N35, N95, O15, P26 |
| …………………………FENG Chen, CHEN Shu and BAI Caiquan (146) |
| • Demographic Structure Transition, Demographic Dividend Evolution and Export Growth:Evidence from Chinese City-level Data |
Summary： Since China's reform and opening up, demographics have played an important role in the development of China's overseas trade. The huge population provides an abundant and cheap labor force for Chinese firms and also lays a solid foundation for the successful implementation of the export-oriented economic development strategy. Since the start of the 21st century, however, China's demographic structure has been undergoing profound changes. On the one hand, the demographic dividend is gradually disappearing, and the problems of population aging and labor shortage have become more prominent. On the other hand, with the gradual easing of the household registration system (Hukou system), the domestic population flow has become more frequent. Since the 1980s, more than 340 million people in China have migrated; that is the largest population migration in human history. Amid a shifting demographic structure and the increasing frequency of population migration, it is important to study the impact of structural demographic changes on exports and its mechanism from a micro perspective. Doing so can not only highlight the necessity of focusing on the “talent dividend” rather than the “demographic dividend”, but also help clarify how to transform and upgrade China's overseas trade.
Using data from the three national censuses in 2000, 2005, and 2010 and highly detailed firm export information provided by the Customs Database, this paper constructs a demographic structure indicator that includes population migration information at the city level and studies the effect of demographic structure changes on firm exports. The results indicate that an increase in the labor-population ratio or a decline in the dependency ratio will significantly promote exports, a result that holds under a multi-dimensional robustness test. The impact of city demographic structure on exports will gradually weaken with the increase of labor costs and human capital level; that is, there are cost-and human capital-related effects of demographic structure changes on exports. Further analysis shows that the impact of city demographic structures on exports is mainly due to the dependence on labor input.
To solve the potential endogeneity problem in the empirical estimation, this paper first adopts a more exogenous explanatory variable, namely the demographic structure. In addition, by using highly detailed panel data (firm-product-destination-trade mode-year), potential reverse causality problems are avoided. Third, this paper constructs high-dimensional panel data for firm-product-destination-trade mode-year, which greatly reduces the biases caused by omitted variables through strict fixed effect control. Fourth, multiple demographic indicators, such as the city-level dependency ratio, are constructed to deal with the measurement error problem. Fifth, the data dimensions are scaled and the benchmark results are verified repeatedly across multiple dimensions. Sixth, using historical variables as instrumental variables for regression, the credibility of the benchmark results is further verified.
This paper contributes to the literature in several ways. First, it builds a demographic structure index based on population migration information at the city level, which enables micro-level analysis of the relationship between demographic structures and exports. Second, this paper identifies cost and human capital mechanisms in the effect of demographic structures on exports from a micro perspective. Compared to the existing theoretical analysis framework, which is based on the saving rate mechanism, these mechanisms are important supplement. Third, the conclusions of this paper not only provide empirical evidence for the necessity of accelerating from a “demographic dividend” focus to a “talent dividend” focus in China, but also help to explain the current “talent war” between cities. It provides empirical evidence for promoting the reform of the current household registration system and realizing the rational flow of labor.
Keywords： Population Structure； Export Growth； Cost Effect； Human Capital Effect
JEL Classification： F16, J14, R11 |
| …………………………TIE Ying, ZHANG Mingzhi and CHEN Rongjing (164) |
| • The Regulatory Role of Stock Exchange Comment Letters: Evidence from Textual Analysis of Merger and Acquisition Plans |
Summary： Recent research on the effectiveness of the regulatory filing review and comment letter process has focused almost exclusively on reviews of annual reports and filings involving initial public offerings (Bens et al., 2016; Johnston & Petacchi, 2017; Li & Liu, 2017; Chen et al., 2018, 2019). In contrast, reviews of filings involving mergers and acquisitions (M&A) have received little attention. This represents an important gap, considering the institutional differences between annual report comment letters and M&A comment letters. During China's economic transition, severe information asymmetry has frequently led to M&A deals that serve the tunneling objective of company insiders rather than as a means to reallocate capital across firms (Baek et al., 2006; Cheung et al., 2009). Because the 13th Five-Year Plan vigorously promotes M&As to optimize the industrial structure, the active monitoring role that stock exchanges have filled since 2014 through M&A inquires has become an important factor in the proper functioning of M&A activities. In this paper, we study whether M&A comment letters reduce information asymmetry and thereby improve M&A performance.
There are several institutional differences between annual report comment letters and M&A comment letters. First, during China's economic transition, severe information asymmetry has plagued the M&A process. Target companies are usually private firms with poor information environments (De Franco et al., 2011; Wang & Kan, 2014), and confidentiality agreements in M&A deals have led to an absence of public information in the period before the merger announcement. Meanwhile, due to the complicated estimation techniques involved in valuation models, M&A filings emphasize forward-looking details to a greater degree (Kimbrough & Louis, 2011), whereas annual reports mainly focus on historical information. Second, firms that receive M&A comment letters are required to file a revised M&A plan, including necessary clarifications or supplemental information to address any deficiency. This requirement is distinct from the annual report review process, in which firms only need to respond to stock exchange comment letters. Due to such differences, the monitoring effect of M&A inquiries is not well-understood.
To analyze the effect of stock exchange comment letters on M&A transactions in China, we first investigate whether stock exchange comment letters identify potential M&A risks. We find that acquisitions with higher information asymmetry and lower reporting quality are more likely to receive stock exchange comment letters. Second, we explore the effect of comment letters on information asymmetry in M&A transactions and find that comment letters reduce bid-ask spread, analyst forecast error, and analyst forecast optimism. In addition, through textual analysis, we document that stock exchange comment letters lead to revised M&A plans containing longer and more detailed historical and forward-looking information about target firms; this is a potential channel through which stock exchange comment letters may reduce information asymmetry in M&A transactions. Third, we further examine the influence of comment letters on M&A performance and find that commented firms with more revisions in their M&A plans are more likely to complete their transactions and obtain higher long-run market performance. Collectively, our results show that stock exchange comment letters in M&A transactions improve information disclosure and reduce information asymmetry, thereby improving M&A performance.
Our study may be the first, or among the first, to document the effect of comment letters on M&A transactions, and it contributes to the academic literature on the effectiveness of the regulatory filing review process. In addition, our use of textual analysis to investigate the information content and specificity of M&A plans helps open the “black box” of M&A filings. Furthermore, our findings shed light on the monitoring mechanisms and economic consequences of comment letters in M&A transactions.
Keywords： Stock Exchange Comment Letters; Textual Analysis; Mergers and Acquisitions; Information Asymmetry
JEL Classification： G14, K22, M41 |
| …………………………LI Xiaoxi, YANG Guochao and RAO Pingui (181) |
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