| Economic Research Journal (Monthly) Vol.54 No.4 April, 2019 |
| ? The Construction of a Modern Economic System in the Context of High-quality Development: A New Framework |
Summary： China’s economy is transitioning from a phase of rapid growth to a stage of high-quality development. The Chinese government states that developing a modern economic system is both a strategic goal and an urgent requirement for getting smoothly through this critical transition. How should one theoretically interpret the concept of a modern economic system and the logic behind it? What characteristics of the existing economic system differ from a modern one? What is the operating mechanism of an economic system? How should one understand China’s economic development and transformation since the beginning of the opening up reforms?
Using economic systems as our core concept, we establish a new framework to answer these questions. An economic system is an organic whole consisting of links between the various levels and various fields of social and economic activities. The concept emphasizes the integrity of the economy. Building a modern economic system does not entail building a completely new economic system from scratch. Since the initiation of the opening up reforms, new interactions and internal connections have been formed at all levels of China’s social and economic activities. We call China’s current system the “traditional economic system”. The traditional economic system corresponds to the period of rapid growth that has ended; it does not meet the requirements of high-quality development. Building a modern economic system can be understood as transforming the economic system from a traditional economic system to a modern economic system. Placing the concept of economic systems at the core, our framework looks at three disciplines, four turns and four mechanisms.
Our framework integrates the methods of the three disciplines of socialist political economy, microeconomics and macroeconomics. An economic system includes four elements: the principal contradiction in a society, the resource allocation mode, the industrial system and the growth model. We emphasize that the principal contradiction is a concept from socialist political economy. A contradiction is the unity of opposites and comes from dialectics. Marxist philosophy argues that contradictions exist in the development of all things; in the development of complex things, there are many contradictions, one of which must be the principal contradiction because it influences and regulates the existence and development of other contradictions. Appling this to the socio-economic field leads to the concept of the principal contradiction of a society.
The four turns are the characteristic transformations of the four elements from a traditional to a modern economic system. For the principal contradiction, what we now face is the contradiction between unbalanced and inadequate development and the people’s ever-growing need for a better life. The mode of resource allocation is shifting from government-led to market-driven, from simple methods (government policies focused on growth, basic market mechanisms) to complex methods (government policies focused on public service, market mechanisms playing the decisive role). The industrial system is shifting from a focus on manufacturing to a focusing on service industries and each industry is shifting from low-end dominance to middle-to-high-end dominance. The growth model is changing from high-speed to sustainable growth and from low-quality to high-quality development.
The four operating mechanisms of economic systems reflect the interrelationships between the four turns. Mechanism 1 describes how the nature of the principal contradiction in a society determines the mode of resource allocation. Mechanism 2 looks at how the mode of resource allocation determines the characteristics of the industrial system. Mechanism 3 ensures the consistency of the industrial system and the economic growth model. Mechanism 4 shows that rapid growth causes the evolution of the principal contradiction in a society and leads to an endogenous transformation from a traditional economic system to a modern economic system.
Keywords： Economic System; Principal Contradiction in a Society; Mode of Resource Allocation; Industrial System; Growth Model
JEL Classification： P20, P30, P51 |
| …………………………GAO Peiyong, DU Chuang, LIU Xiahui, YUAN Fuhua and TANG Duoduo (4) |
| ? Local Government Debt Replacement and Macroeconomic Risk Mitigation |
Summary： China began a new round of positive fiscal policy in 2009, exceeding its previous four-year cycle (1998-2002). The fiscal stimulus policy, supported by credit expansion in this round, focuses on off-budget infrastructure construction investment, which does not show in the fiscal statistics of local governments. Off-budget financing and construction encourages local governments to make full use of debt’s “double investment-inducing” effect and issue debt to promote local economic growth. Local government debt financing mainly consists of short- and medium-term loans from financial institutions, but investments are in long-term infrastructure construction. This maturity mismatch leads to debt financing and reimbursement being highly dependent on the revenue from land sales. Thus, local debt risk is closely linked to land price risk, which makes it more difficult to control local government debt risk. Principal and interest payments for existing debts have increased the burden on local governments and limited their ability to invest in infrastructure. More importantly, a large number of defaults would likely trigger systemic financial risk and undermine the stability of the financial system. It remains open to debate whether debt replacement is a solution for local government debt sustainability. How does the change in debt maturity through debt replacement impact economic growth in the long term? Can it mitigate the downside risks in the economy?
To answer these questions, we incorporate shadow banking and land financing into a five-sector DSGE model to study how debt replacement influences the short-term debt risk of local governments and long-term economic growth and how it improves local debt sustainability and mitigates debt risks. Using both mathematical derivations and numerical simulations, we analyze the effect of debt replacement on the incentives of individual agents and on the macroeconomy and evaluate the effectiveness of fiscal policy during the process of replacement.
Our results suggest that local governments’ debt unsustainability in China is mainly due to a slowdown in economic growth, the high cost of local government funds and the increasing uncertainty of land transfer revenue. Extending the debt maturity structure through debt replacement alleviates the debt accumulation caused by macro factors, improving debt sustainability. However, debt replacement does not fundamentally change the relative magnitudes of a shock’s influence on macroeconomic variables such as output and inflation. With the extension of debt maturity, the influence of interest rate changes on macroeconomy increases. Debt replacement reduces the negative impact of macroeconomic risk caused by technology shocks and improves the short-term effect of local government spending. However, due to the “asset-liability constraint effect” and the “income expectation effect”, the crowding out effect of fiscal stimulus on the real economy increases in intensity and duration. This leads to a bigger fall in output in the medium to long term. In the process of debt replacement, the effectiveness of expansionary fiscal policy increases but induces greater economic volatility in the short term. With continuous debt replacement, quantitative monetary policy is more helpful in increasing the effectiveness of fiscal policy but has a risk of increased inflation.
Our results suggest that bond financing by local governments should make use of a market-based risk pricing system, which would reduce the negative impact of low bond rates on the real economy due to non-market-based bond pricing. Local governments should also make the most of the maturity extension resulting from debt replacement and use the savings on interest payments to improve local industrial infrastructure. Local governments should optimize their proportion of government and private capital and avoid infrastructure investments that are duplicated or have low returns.
Keywords： Keywords: Debt Replacement; Maturity Structure; Macroeconomic Risk Mitigation; DSGE Model
JEL Classification： C51, E52, E62
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| …………………………LIANG Qi and HAO Yi (18) |
| ? Multidimensional Performance Appraisals, Chinese Government Competition and Local Tax Administration |
Summary： China’s performance appraisal system, which uses GDP as the main indicator, is important for China’s rapid development. However, due to the inevitable conflict between the focus of performance appraisals and residents’ needs, this system is also an important cause of local governments’ incentive distortions, which makes them reduce their efforts in education, medical care and environmental protection. To solve the problem of incentive distortions caused by the performance appraisal system, the 18th CPC National Congress issued a series of normative documents that reform the cadre appraisal system and improve the welfare of residents.
As one of the most important policy tools of the government, a change in the tax rate directly affects the welfare of residents. If the tax rate is too high, economic growth stalls and residents’ private consumption is reduced. If the tax rate is too low, the supply of public goods is insufficient. Many studies show that China’s tax legislative power is highly centralized; local governments cannot directly change the statutory tax rate, but they can influence the effective tax rate by changing the intensity of tax administration. The performance appraisal system is one of the most important reasons for competition between local governments in China. However, there is still debate over whether local governments are in a “race to the bottom” or a “race to the top” in tax competition. We study the relationship between government competition and local tax administration in China from theoretical and empirical perspectives to explore the impact of China’s performance appraisal system on residents’ welfare.
The theoretical model shows that the prize-to-participant ratio affects the incentives of competitors by influencing the marginal probability of winning. There is an inverted U-shaped relationship between this ratio and competitors’ incentives. If performance appraisals pay more attention to economic growth than to residents’ welfare, there will be a U-shaped relationship between the prize-to-participant ratio and the intensity of tax administration. Strengthening promotion incentives makes local governments reduce their tax administration efforts and implement a race to the bottom tax competition strategy. If performance appraisals pay more attention to tax revenue, strengthening promotion incentives makes local governments increase their tax administration efforts. When the focus of performance appraisals is consistent with residents’ concerns, promotion incentives do not impact tax administration efforts.
We then use the number of counties within prefecture cities to measure the competition intensity of county governments, empirically studying the impact of government competition on local tax administration efforts in China. The number of counties within prefecture cities in China varies greatly while the number of promotion posts offered by prefecture cities is constant because posts for Chinese government officials are decided by the central government. Therefore, the number of counties determines the competition intensity at the county-level for government officials. We empirically study the impact of government competition on local tax administration using an exogenous natural topological characteristic, the length of small streams, as an instrumental variable for the number of counties. There is a U-shaped relationship between the number of counties and tax administration efforts, which indicates that economic growth is a relatively more important appraisal indicator in our sample period and that promotion incentives lead to a race to the bottom in tax administration. Compared with enterprises in the areas with the weakest promotion incentives, the tax administration efforts for enterprises in the areas with the strongest promotion incentives are 30% lower. To improve residents’ welfare, the government needs to consider their preferences, improve the monitoring of residents and develop a preference response mechanism, which would improve the government’s response to residents’preferences when it modifies the performance appraisal system.
Keywords： Multidimensional Performance Appraisal; Chinese-style Government Competition; Local Tax Administration; Residents’ Welfare
JEL Classification： H20, H26, H77 |
| …………………………XU Jingxuan, WANG Xiaolong and HE Zhen (33) |
| ? Cross-border Links of Chinese Banks and the Dynamic Network Structure of the International Banking Industry |
Summary： An important lesson of the 2008 international financial crisis is that there are no effective tools for monitoring cross-border risks. The traditional monitoring system focuses on the balance sheets of financial institutions and does not adequately monitor cross-border, cross-market, cross-agency and cross-business transactions. In an open global economy with frequent communication and extensive international trade, financial relationships between countries are ever closer, meaning that economic fluctuations in one country are rapidly transmitted to the rest of the world. How to effectively monitor cross-border exposure is difficult problem both in theory and in practice as there are insufficient data and theoretical and methodological problems (Johnston et al., 2009). There are relatively few studies of cross-border financial links. There are some studies that explore the spread of risk between Chinese banks using the maximum entropy method. However, most studies of China’s banking network use static methods.
In this paper, we investigate the cross-border links of Chinese banks and analyze the dynamic characteristics of the network of the international banking industry using complex network theory. We use seasonal credit statistics from 1994 to 2016 from the Bank for International Settlements (BIS). The status of the Chinese banking industry in the international financial system continuously improved over this period along with China’s financial stability, while the Chinese banking industry’s sensitivity to external shocks decreased. With the deepening of globalization and increase in international economic cooperation, cross-border links between banks in different countries have become increasingly close since the 1990s but significant structural changes have taken place since then. The network structure of the international banking industry features increasing geographic regionalization. Cross-border links between economies which were heavily hit by the financial crisis are very different from others and the international influence of their banks has declined. The world financial structure, once dominated by European and American countries, is changing quietly and the international banking industry may soon be multi-polar.
We make the following contributions. First, the literatures focus on domestic links while international studies usually exclude Chinese banks from their samples. We use BIS regional bank statistics as a sample to measure and analyze the cross-border links of Chinese banks. Second, we overcome the shortage of the full-linked network structure hypothesis for the maximum entropy method and analyze the cross-border links of Chinese banks and the dynamic network structure of the international banking industry with real data using complex network theory. Third, following Spelta & Arajo (2012a, 2012b), we use the minimum spanning tree and hierarchical clustering analysis methods to examine cross-border links as robustness checks to reduce the interference of redundancy relations in a complex network. Fourth, we explore the dynamic evolution of the overall bank network with an indicator for normalized tree length (NTL) and analyze the status changes of Chinese banks in the international banking network.
Our findings on cross-border links in the banking industry has important policy implications. Our results will help to promote the international expansion of Chinese banks and allow them to carry out cross-border business more efficiently. The government can use our results in formulating financial regulatory policies that improve the macro-prudential framework by strengthening the monitoring of cross-border financial risks. Improving the measurement of international financial network links helps to close the information gap, which is one of the important issues facing regulatory authorities.
Keywords： Banking; Cross-border Linkages; Complex Network Structure; Minimum Spanning Tree; Hierarchical Clustering
JEL Classification： F34, C82, E51 |
| …………………………CHEN Menggen and ZHAO Yuhan (49) |
| ? Direct Government Intervention and Systemic Tail Risk: Evidence from the National Team Stock Rescue during the 2015 Crash |
Summary： The debate on whether governments should intervene in the market during financial crises has gone on a long time. Some studies argue that government intervention restores faith in the market and has limited negative effects. Many other studies find that government intervention fails to achieve the original objective of improving economic conditions and can hurt market quality. Because of moral hazard and concerns of excessive intervention by governments in the private sector, we rarely see direct purchases of individual stocks by governments. Interestingly, one of the key measures used by China to battle the 2015-2016 stock market crash was the direct purchase of company stocks.
Between June of 2015 and January of 2016, the Chinese A-share market experienced three major crashes. The total loss in market value was 36 trillion RMB, which accounted for 52% of China’s gross national product in 2015.The stock price crashes triggered a market panic that destroyed investor confidence.To prevent further declines in stock prices and the outbreak of more serious systemic financial risk, the Chinese government implemented a series of rescue policies. In addition to lowering interest rates, suspending IPOs, banning short selling and restricting share sales by large shareholders, the Chinese government formed a national team to directly buy and sell individual company stocks. State-linked funds such as the China Securities Finance Corporation Limited (CSF)and the China Central Huijin Investment Limited (CCH)directly bought stocks from more than 1,000 firms starting on July 6, 2015.In terms of total market value, the national team holdings at one point exceeded 4,000 billion RMB, about 8.4% of the total market capitalization of all listed companies.
We investigate the economic consequences of the Chinese government’s intervention. Using Chinese stock market data from the third quarter of 2015 to the fourth quarter of 2016, we find that the direct purchase of stocks by the national team stabilized the Chinese stock market during the crash period. The national team’s shareholdings significantly lowered firm-specific systemic tail risk as measured by the extreme dependence between individual stock returns and market returns in the left- or right-tail of the joint distribution. The national team’s impact on stock price systemic tail risk was asymmetric; the government shareholdings had a stronger effect on systemic left-tail risk than on systemic right-tail risk. Our findings are robust to a series of alternative empirical designs such as propensity score matching and two-stage least-square regressions, which address possible endogeneity concerns. Further tests show that the national team’s purchases functioned as a mechanism for providing extra liquidity and restoring investors’ confidence, which led to the decrease in the systemic tail risk. We also find that the increase in the national team’s shareholdings was associated with decreased market quality as measured by decreased pricing efficiency and increased transaction costs.
Our study enriches the literature on financial crises, government interventions and the mechanism of market stabilization. We provide empirical evidence for policies to enhance the long-term stability of the financial system. Our findings have important theoretical and practical implications. They support the recent theoretical exploration by Brunnermeier et al. (2017) of the influence of direct government intervention via trading and provide empirical evidence for the pros and cons of government intervention in emerging markets. By affirming the positive role of the national teamin stabilizing the stock market at the cost of exacerbated price efficiency and transaction costs, our findings provide regulators with a more complete picture of the effect of direct government interventions.
Keywords： Stock Market Crash; Government Shareholdings； Systematic Tail Risk
JEL Classification： G14, G12, G10
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| …………………………LI Zhisheng, JIN Ling and ZHANG Zhichen (67) |
| ? Business Environment, Enterprise Rent-seeking and Market Innovation: Evidence from the China Enterprise Survey |
Summary： Rent-seeking is prevalent throughout the world. It includes the illegal act of companies paying bribes to government officials to obtain permits or business licenses or to reduce administrative steps. The mainstream view is that rent-seeking is a self-interested investment by firms in their activities and social networks closely related to innovation. Rent-seeking helps companies to quickly enter a market and to develop opportunities but has corresponding resource losses for enterprises. Some developed countries and emerging economies have taken effective measures such as optimizing the business environment to curb rent-seeking and its associated economic harm. As the world’s second largest economy, China is the biggest contributor to world economic growth. Its growth mode is shifting from high-speed growth to high-quality growth. The Chinese government has been optimizing its business environment since 2013 by comprehensively deepening reforms and boosting the vitality of domestic and international economic development. The Chinese government has taken the following measures to optimize its business environment. First, it has expanded market access to allow foreign-funded enterprises and to make investments in domestic companies more convenient. Second, the government has increased law enforcement efforts to promote more fair and orderly market competition. Third, the “Internet Plus Government Services” initiative has been established to make enterprise affairs more efficient. Fourth, the government has created a sound evaluation mechanism to make the business environment evaluation more effective. Consequently, the World Bank’s “Doing Business” report for 2019 ranks China’s business environment 46th of 190 economies, up 50 places from 2013.
In this paper, we examine empirically whether optimizing the business environment promotes market innovation and curbs the negative impacts of rent-seeking. We use data from the World Bank’s China Enterprise Survey, which was conducted between December 2011 and February 2013. We make the following contributions to the literature. First, we theoretically explore the impact optimizing the business environment has on rent-seeking and market innovation. Second, we examine the difference in the impact optimizing the business environment has on innovation between non-rent-seeking enterprises and rent-seeking firms and identify the different innovation strategies the two types of firms use.
Optimizing the business environment both has a positive impact on market innovation and significantly eliminates rent-seeking and the distortions it causes. Rent-seeking is a way for enterprises to take the lead in development. For market innovation, rent-seeking helps enterprises to obtain business licenses conveniently and shortens the time-to-market for new products, promoting market innovation. Compared with management innovation, optimization of the business environment severs the political relationship between rent-seeking enterprises and officials. That is, optimizing the business environment negatively affects the innovation effects of rent-seeking but positively influences market innovative activities. There are significant differences between rent-seeking enterprises and non-rent-seeking firms in innovation decision-making. Optimizing the business environment helps non-rent-seeking enterprises invest resources into R&D.
We encourage the Chinese government to further simplify the approval processes for commercial registration and administrative licensing and to adopt a combination strategy of appropriate deregulation and the cancellation of pre-approval for conventional products. Improving the management system of the labor market and strengthening the supervision of administrative approval are also indispensable means for preventing vicious competition in the market.
Keywords： Business Environment; Enterprise Rent-seeking; Market Innovation
JEL Classification： A14, F27, F83 |
| …………………………XIA Houxue，TAN Qingmei and BAI Junhong (84) |
| ? Natural Geographical Constraints, Land Use Regulations and China’s Housing Supply Elasticity |
Summary： The excessive growth in housing prices is one of the core problems that plagues China’s economy, and it is a social issue that affects people’s livelihoods. Research on China’s housing market focuses on demand factors; research on the supply side is relatively scarce. To fully explore the fundamental problem of the rapid growth in housing prices, one must consider the supply-side in-depth as the supply side is more influential for housing prices than the demand side (Glaeser et al., 2006). We explain the reasons behind the high housing prices in China from the perspective of housing supply and provide a theoretical reference for the state to regulate the real estate market and stabilize housing prices.
Because housing supply elasticity represents a city’s housing supply responsiveness, we look at housing supply flexibility to study China’s housing supply. Housing supply flexibility is one of the key determinants of housing prices (Liu, 2014; Glaeser et al., 2006). Is China’s urban housing supply inelastic? What is the key factor affecting the elasticity of housing supply? To explore these questions, we construct a single-center city model that includes natural geographical constraints, cultivated land protection constraints and floor area ratio regulations to focus on the impact of these three factors on housing supply elasticity. Using digital elevation data and land use data, we comprehensively measure the natural geography constraints and the stringency of floor area ratio regulations in China’s urban land development. Looking at China’s urban areas between 2005 and 2013, we estimate the supply elasticity using an identification strategy based demand changes caused by exogenous shocks to examine the impact of natural geographical constraints and floor area ratio regulations on housing supply elasticity in China. We take into account possible endogeneity problems using the instrument variable method to empirically test the theoretical predictions. In addition, we restrict the sample by removing urban areas whose areas change greatly and by deleting municipalities to test the robustness of the regression results.
Our empirical results show that the overall urban housing supply in China is characterized by a lack of elasticity and that natural geographical constraints and floor area ratio regulations are both important reasons for the lack of elasticity in housing supply. Further analysis shows that the housing supply of more populous cities is more inelastic and the more restricted by natural geographical constraints.
Our paper provides empirical evidence for developing countries to the literature on housing supply. It also provides a new perspective for explaining the current overall price increases in China, especially for the fact that housing prices in large metropolitan areas remain high. Local governments should adhere to the concept of compact urban development, appropriately lower regulations on floor area ratios in land development and improve the efficiency of their urban land use. The central government should insist on the idea of “governance by the city”, scientifically formulate and implement a residential land supply plan, gradually increase the supply of land in metropolitan areas with low elasticity and accelerate the establishment of a housing system with multi-agent supply to promote the steady and healthy development of the real estate market.
We make three contributions. First, we comprehensively measure the proportion of non-developable land and the regulation stringency of floor area ratios in China. Second, we address the endogeneity problem in estimating the impact of China’s floor area ratio regulations on housing prices. Third, we investigate the direction and intensity of the impact of natural geographical constraints and land use regulations on China’s housing supply elasticity. Ours is the first study of the impact of cultivated land protection restrictions on the flexibility of housing supply in China.
Keywords： Housing Supply; Natural Geographical Constraints; Floor Area Ratio Regulation; Housing Prices
JEL Classification： O18, R28, R31 |
| …………………………LIU Xiuyan，DU Cong and LI Songlin (99) |
| ? The Impact of Urban Land Quota Allocation on China’s Housing Market |
Summary： Over the past two decades, China has witnessed a continuous rise in housing prices alongside rapid urbanization, especially in large cities in coastal areas. With the rapid growth in housing costs, the speed of urbanization in China has begun to decline in recent years. Many scholars believe that the boom in housing demand is the main reason for the soaring housing prices. However, the cost of land accounts for a large proportion of house prices, so urban land supply also plays an important role. In this paper, we focus on the effect of China’s urban land supply on the housing market.
Unlike most countries in the world, China uses a quota system to control its urban land supply to protect cultivated land. The operation of the system can be described as a process of quota allocation, with land distributed to regions by central and provincial governments and then allocated further for different purposes by local governments. First, the central government sets up a total quota of urban land supply every year and allocates land to each province. With the help of its agents, the provincial governments, land is eventually distributed to each county through the process of regional allocation. Second, county governments, which hold the power of purpose allocation, set up industrial land quotas, residential land quotas, infrastructure land quotas and land quotas for public management and service purposes.
We construct a theoretical model to investigate an incentive mechanism that prompts provincial governments to distribute land to counties and encourages county governments to allocate land for different purposes. Because urban land supply is vital for economic development, fiscal income growth and urbanization, we hypothesize that a financial incentive and an urbanization incentive play important roles. Our model reveals that county governments expand industrial land at the expense of residential land when the financial incentive dominates. However, the land allocated to counties by provincial governments depends both on population agglomeration at the city level and on the pattern of urbanization. When small or medium cities have the priority to develop, large cities are allocated less land, irrespective of their agglomeration ability. Therefore, China’s housing market is affected by the land allocation behavior of governments at multiple levels.
Our empirical results show that an increase in the financial incentive for county governments decreases the allocation of residential land relative to industrial land significantly. Additionally, large cities are allocated relatively less land. Further analysis finds that both the total amount of urban land allocated by provincial governments to counties and the proportion of residential land allocated by county governments have a positive impact on the sale of houses per capita. However, increasing the financial incentive of county governments significantly reduces the positive impact of the total amount of urban land on the housing market. Given these empirical results, China’s real estate market can be summarized as follows. The regional allocation of urban land is negatively related to population agglomeration and the allocation of residential land is reduced to increase industrial land. The combination of these two effects result in the spatial mismatch of population, land and housing.
China is experiencing a transition from a planned economy to a market economy. For scholars trying to understand how the Chinese government allocates important resources during this transition period, our study provides important information. Our study also has a silver lining for China’s urbanization process, which is now plagued by high housing prices. Our results suggest that to achieve sustainable urbanization, land allocation must be consistent with population agglomeration and the incentive mechanism of residential land supply should be restructured at the county level.
Keywords： Urban Land Supply; Resource Allocation; Housing Market; Financial Incentive; Urbanization
JEL Classification： O18, P35, R31 |
| …………………………YU Jixiang and SHEN Kunrong (116) |
| ? Public-Private Partnerships: A Theory of the Public Goods Burden |
Summary： After first appearing in the UK in the 1990s, public-private partnerships (PPPs) have been widely used all over the world. China first used PPPs in the mid-1990s. Their importance for China’s development has steadily increased since then. PPPs promote economic growth, facilitate infrastructure construction and relieve local debt pressure. However, the central government’s enthusiasm for PPPs is not reflected in current survey data. The barriers and huge cost to PPP financing leads to inadequate participation by private firms, which seriously hinders the implementation of PPPs.
The literature provides explanations for this dilemma in PPP implementation. Because PPPs are usually used for large infrastructure construction projects, they usually involve 10 to 30 years of cooperation between local governments and private businesses. However, it is impossible to predict and contract for all possible contingencies that can arise over such a long horizon. The intrinsic incompleteness of PPP contracts hinders the implementation of PPPs (Martimort et al., 2005; Bettignies & Ross, 2009; Iossa & Martimort, 2015).
Studies of PPP implementation usually assume that local governments fully comply with PPP contracts and do not use their administrative authority to extort additional gains. This assumption ignores the great differences in the governance environment and economic development level between countries. For the last 30 years, there has been a phenomenon in China’s PPP market that can be called the “public goods burden”. Once PPPs form, local governments often engage in policy interventions for PPP projects which have adverse effects on the private partner. This is the main risk for private firms participating in PPP projects. However, the main goals of local governments in using these policy interventions are to improve public welfare, maintain public safety and satisfy the demand for public goods. These motivations for local governments’ behavior are often overlooked.
We construct a theoretical framework to analyze the strategic interaction between local governments and private firms using the framework of incomplete contracts. We examine the conditions under which local governments force private firms to bear the public goods burden and the impact on private firms’ willingness to participate in PPP projects. Our model is an extension of incomplete contract theory that examines the impact of the risk structure and information asymmetries on PPP contracts.
We find that local governments should use different strategies to promote PPP at different stages of development. In the 1990s, when PPPs were first introduced in China, the low number of PPP projects and the high market demand for infrastructure meant that the optimal strategy for local governments was to entice private firms with favorable terms and, after forming a PPP, to improve public welfare by imposing the public goods burden, which prevents private firms from acquiring excessive private benefits. China’s infrastructure level and industrial development level have greatly improved since the 1990s. If local governments still impose the public goods burden on private firms, the entry incentives of private firms will be severely weakened, causing difficulties in the implementation of PPP projects. Based on China’s current stage of development, the best strategy for local governments to promote PPPs is to solve the time-inconsistency problem by clarifying power boundaries. Only in this way can China improve the entry incentives of private companies and allow PPPs to play a useful role in alleviating local financial pressure and ensuring the supply of public goods.
Keywords： Public-private Partnership; Public Goods Pricing; Incomplete Contract Theory; Supply-side Structural Reform; Development Stage
JEL Classification： G14, G38, C71 |
| …………………………GONG Qiang, ZHANG Yilin and LEI Liheng (133) |
| ? The Five-Year Plans and Chinese Firms’ Cross-border Mergers and Acquisitions |
Summary： The share of Chinese firms in global cross-border Mergers and Acquisitions （M&As） transactions is increasing. In 2016, China surpassed the U.S. to become the world’s largest cross-border purchaser. However, Chinese firms’ cross-border M&As also have problems with relatively high M&As premium rates but low completion rates. We argue that this is related to China’s industrial policies.
The five-year plans for industrial policies are a salient feature of China’s economic development. These policies support the development of certain industries to promote industrial upgrading and economic development. We argue that there are several links between China’s industrial policies and Chinese firms’ cross-border M&As. First, cross-border M&As are a way for Chinese firms to respond to industrial policies and achieve industrial upgrading in the short run. Second, industrial policies guide firms to invest and innovate and play an important role in guiding resource allocation. In particular, financial systems such as banks often give priority to these industries when providing credit support. Third, because Chinese firms supported by industrial policies are mainly implementing national strategies and policies, resistance from host countries are stronger, resulting in lower M&As completion rates despite Chinese firms’ higher bids.
We empirically examine these conjectures on the relationship between Chinese industrial policies and cross-border M&A activities. We use cross-border M&As data for Chinese firms from the Thomson One M&As transaction database for the eighth to twelfth five-year plans (1991-2015). We divide firms into two groups depending on whether their industries are supported by the contemporary five-year plan and study the impact of such industrial policies on the cross-border M&As premium rates and completion rates.
Our results show that, compared with firms whose industries are not supported by the contemporary five-year plan, supported firms pay a higher merger premium of 8-10%. However, the average completion rate of supported firms is about 36% lower. Furthermore, supported firms are more likely to obtain debt financing such as bank loans and their interest expenses are lower. These firms also receive more government subsidies. Our findings suggest that even if cross-border M&As are effective in promoting China’s overall industrial and technological upgrading, Chinese firms pay a high price. Therefore, for cross-border M&As transactions proposed by Chinese firms with high asset-liability ratios and those supported by industrial policies, more stringent audits and restrictions are required. Improving the regulatory system would stabilize the pace of Chinese firms’ international expansion and improve the implementation of the “One Belt, One Road” initiative.
The first contribution of this paper is to link the industrial upgrading led by the Chinese government with the cross-border M&As activities of Chinese firms. We document features of Chinese firms’ cross-border M&As such as high premium rates and low completion rates and connect these features to the implementation of national industrial policies. This explanation deepens our understanding of the motivations and determinants of Chinese firms’ cross-border M&As activities. Second, we point out that cross-border M&As have gradually become an important mechanism for the implementation of China’s industrial policies. We provide evidence that industrial policies play a role in allocating bank loans and government subsidies. It should be noted that we do not assess how much such cross-border M&As contribute to industrial and technological upgrading or whether they improve the performance of Chinese firms in the long run. A detailed analysis of these issues could be a subject of future research.
Keywords： cross-border M&As; Industrial Policy; M&As Premium; M&As Completion
JEL Classification： G34, G38, F23 |
| …………………………ZHONG Ninghua, WEN Riguang and LIU Xueyue (149) |
| ? The Influence of Married Women’s Labor Force Participation on the Household Savings Rate in China |
Summary： China’s economic growth has slowed from 10.4% in 2010 to 6.6% in 2018. Consumption, export and investment are currently the three main drivers of economic growth. In the past, economic growth was mainly driven by investment demand, import and export. Since opening up, China has made large investments in fixed assets, especially in the real estate, infrastructure and manufacturing industries. While this has promoted rapid economic growth, it has also saturated the market demand for investment. The escalating Sino-U.S. trade war has further aggravated the instability of China’s foreign trade export situation. Against this background of declining investment demand and a weak domestic and foreign economic environment for import and export trade, it is particularly important to use consumer demand to stimulate economic growth.
We look at how female labor force participation affects the high savings rate of Chinese households. How does married women’s participation in the labor market affect household consumption, income and savings? Theoretically, as a source of insurance for family income fluctuations, married women’s labor force participation should reduce a family’s preventive savings motivation. However, the female labor force participation rate in China is so high while the level of household savings is also high. It seems that the preventive savings motivation does not decrease with the increase in female labor force participation. Married women receive income when they participate in the labor market. However, after women participate in the labor market, the level of household consumption may increase in step with the increase in income, making the impact of married women’s labor force participation on the household savings rate uncertain. Does the level of household consumption and income increase simultaneously when married women participate in the labor market? How does the household savings rate change? This needs to be answered and tested both theoretically and empirically.
Compared with the literature, we make four contributions. First, we provide a new perspective for analyzing the household savings rate. Second, we use the labor force participation rate of other married women of the same age in the same community (or village) as an instrument for the labor force participation of married women to identify the variables of concern, which makes the estimation results more reliable. Third, we discuss in detail the differences in the effect of married women’s labor force participation on the savings rate for different groups; we look at groups that differ by age, household registration, education, income level and fertility wishes. Finally, we analyze why married women’s labor force participation contributes to an increase in the household savings rate.
Our estimates show that married women participating in the labor market increases the household savings rate significantly. Further analysis shows that, because of the obvious consumption habits effect in families, when married women participate in the workforce, the consumption level of the family does not change significantly but the income level of the family does increase significantly. We find that the participation of married women in the workforce does not significantly reduce the preventive savings motivation for children’s education, unemployment and pensions but instead increases the preventive savings motivation of families, raising the household savings rate further.
The household savings rate in China is still high and the consumption demand of residents needs to be increased urgently. The government should continue to take measures to encourage household consumption and to improve the social security level of residents. It should focus on strengthening the protections for children’s education, pensions and unemployment to reduce families’ motivations for preventive savings, which would expand domestic demand and stimulate economic growth.
Keywords： Married Women; Household Savings; Labor Force Participation
JEL Classification： E20, J40, N35 |
| …………………………YIN Zhichao and ZHANG Cheng (165) |
| ? The Formation and Historical Evolution of Money Creation: Criticisms of Traditional Money Theory |
Summary： I first posited the “loans create deposits (LCD)” theory in 1996 and then formalized it in 2001. This theory argues that banks create deposit money through asset expansion, explaining the mechanism and rule of money creation from the perspective of credit and balance sheet double-entry bookkeeping. The name comes from the idea that the main avenue for asset expansion is loans. “Loans” include not only what are traditionally thought of as loans, but also banks’ purchases of customers’ assets. This theory challenges the traditional theory of “Deposits Create Loans” and has gradually been recognized by academics. An in-depth analysis of the logic of money creation under the credit money system helps to clarify the relationship between money and economic operation and improves monetary policy.
In this paper, I first analyze the process of money creation in the credit money system and point out that the essence of money creation is debt exchange. The key function of money is neither as a transaction medium nor value storage, but as the organizer of production. The essence of money is not its general equivalent, but that general debt is an infinite intertemporal value scale. The emergence of central banks solves the bank liquidity problem and provides the base money for inter-bank settlements. Then, a multi-tier credit money system forms with a base money tier created by the central bank and another money tier created by banks. In this system, banks create all money, while central banks use base money to control money creation by banks through settlement constraints, cash constraints and required reserve constraints on banks.
I then analyze the historical evolution of money creation and argue against the traditional theory in which the evolution is from commodity money to credit money. I propose that credit money is the main form of money throughout history. The evolution process of money goes from private credit money to government credit money to bank credit money. The carrier of money changes during the development, from an instrument of recording debts to coins and banknotes to cash and deposits supported by central banks in the credit money system.
Next, I discuss the constraints faced by banks in money creation. Although banks are not subject to budget constraints due to the self-balancing of assets and liabilities in money creation, they face the external constraints that arise from loan demand, liquidity and capital and the internal constraints from banks’ internal risk management. Central banks affect loan demand by adjusting interest rates, control liquidity in banking system and set capital constraints. However, banks usually ignore their internal risk management constraints because of moral hazard and they can ease external constraints using shadow activities. Therefore, central banks need to constantly strengthen the external constraints to improve the effectiveness of monetary policy.
Finally, I review China’s monetary policy. The People’s Bank of China has timely adjusted and constantly innovated its monetary policy tools in response to changes in economic conditions to strengthen external and internal constraints, guard against banks’ moral hazards and establish an effective money creation control mechanism. Moreover, the relative importance of external constraints in money creation is also changing. Interest rate constraints are always emphasized by central banks, the importance of liquidity constraints is declining and the significance of capital constraints is increasing. In some respects, China is a leader in monetary policy.
Keywords： Credit Money; Money Creation; Loans Create Deposits
JEL Classification： E51, N90, H63 |
| …………………………SUN Guofeng (182) |
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