FDI and Economic Development: Evidence from China’s Regional Growth

Abstract:

Using China’s provincial data for 1978–2011, we examine the channels through which foreign direct investment (FDI) affects China’s regional growth and inequality. We find that FDI facilitates growth by enhancing physical and human capital accumulation. FDI also has a negative effect on output growth by crowding out domestic investment, reducing local government revenue, and increasing the opportunity cost of technology innovations. The imbalance of FDI inflows among regions widens the interregional growth gap through its effect on physical capital accumulation and technology progress while it narrows the growth gap by affecting the level of higher education, industrial structure, government revenue, degree of openness, and trade surplus.     

Energy-Efficiency Policies and Energy Productivity Improvements: Evidence from China’s Manufacturing Industry

To examine the effects of China’s energy saving and emissions reduction (ESER) policy implemented during the 11th Five-Year Plan (FYP) on energy efficiency of the manufacturing sector, this article evaluates and compares the environmental-adjusted energy productivity of 15 energy-intensive industries during the 10th and 11th FYPs using the data envelopment analysis (DEA) approach. The results indicate that four of the 15 studied industries had achieved significant energy productivity improvements during the 11th FYP than that in the 10th FYP, which can mainly be attributed to the effective implementations of relevant ESER policies. In contrast, energy productivity of the rest 11 industries acquired relatively minor improvements during the whole decade.     

Government auditing and corruption control: Evidence from China’s provincial panel data

Since its foundation, China’s government auditing system has played a very important role in maintaining financial and economic order and improving government accountability and transparency. Though a great deal of research has discussed the role of government auditing in discovering and deterring corruption, there is little empirical evidence on whether government auditing actually helps to reduce corruption. Using China’s provincial panel data from 1999 to 2008, this paper empirically examines the role of government auditing in China’s corruption control initiatives. Our findings indicate that the number of irregularities detected in government auditing is positively related to the corruption level in that province, which means the more severe the corruption is in a province, the more irregularities in government accounts are found by local audit institutions. Also, post-audit rectification effort is negatively related to the corruption level in that province, indicating that greater rectification effort is associated with less corruption. This paper provides empirical evidence on how government auditing can contribute to curbing corruption, which is also helpful for understanding the role of China’s local audit institutions in government governance and can enrich the literature on both government auditing and corruption control.     

Local government centralization and corporate ESG performance: Evidence from China’s county-to-district reform

As a city–county consolidation with Chinese characteristics, China’s county-to-district (CtD) reform transfers a county’s autonomy to a city, thereby strengthening the administrative, decision-making, fiscal and other powers of the prefecture-level municipal government, which effectively enables the centralization of local governments. Based on this exogenous quasi-natural experiment, we use a difference-in-differences (DID) approach to empirically examine the impact of prefecture-level municipal government centralization on companies’ ESG performance. The results show that municipal government centralization can significantly promote corporate ESG performance, which represents environmental protection, social responsibility and corporate governance behavior. The mechanism analysis also shows that the CtD reform can address market segmentation, alleviate policy uncertainty and reduce rent-seeking, which further improves ESG performance.     

State ownership and banks’ information rents: Evidence from China

In a lending relationship, a bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and hence extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in loan interest rates around their IPOs; the central government-controlled Big Four banks exhibit smaller declines in rates they charge, and their rate declines concentrate on loans made to SOEs.     

Directors’ and Officers’ liability insurance and bond credit spreads: Evidence from China

Using hand-collected data on purchases of D&O insurance by Chinese listed firms for the period from 2008 to 2019, we empirically find that D&O insurance negatively associates with credit spreads. The negative relationship still holds after conducting a series of robustness tests and is not driven by the eyeball effect. We also show that D&O insurance can reduce credit spreads via the channels of internal controls, external monitoring, information asymmetry and default risk. Moreover, the negative effect of D&O insurance on credit spreads is more pronounced for non-state-owned firms, those located in regions with a low level of marketization or that employ rating agencies with a bad reputation. Our study complements the literature on the credit spreads and corporate governance.     

The price of carbon risk: Evidence from China’s bond market

Using a 2009–2019 sample of Chinese bond issuers, we examine the effect of carbon risk on bond financing costs. Relative to low carbon risk issuers, high carbon risk issuers have substantially larger bond credit spreads, mainly because their credit risk is greater and they invest the funds in non-green projects. This positive relationship is more pronounced for issuers with financing constraints, those not making a green transition and those in cities with stringent environmental regulations. We find a reversed effect during the COVID-19 pandemic. However, China’s carbon peak and carbon neutral goals have renewed the focus on carbon risk. Carbon risk also causes bond issuers to scale back production and negatively affects their likelihood of receiving long-term financial support. Our findings suggest that investors consider carbon risk and charge a corresponding risk premium.     

Trade Liberalization and China’s Exports of Renewable Energy Products: Evidence from Product Level Data

Using a large panel dataset that covers 116 countries and 62 renewable energy products over the period 2000–2012, this study evaluates the effects of trade liberalization on the export expansion of China’s renewable energy products. The results reveal that trade liberalization plays a crucial role in encouraging the exports of renewable energy products. Specifically, tariff reduction, in general, not only encourages the entry into new export markets, but also induces an increase in the volume of renewable energy products already traded. In addition, the positive effects of trade liberalization are more pronounced for foreign-owned exporters than for state-owned or privately-owned exporters. Also, the ways in which trade liberalization promotes exports of renewable energy products differ by the type, destination or origin of the renewable goods being exported.     

State ownership,soft-budget constraints,and cash holdings: Evidence from China’s privatized firms

We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 2000 to 2012. We find that the level of cash holdings increases as state ownership declines. For the average firm in our sample, a 10 percentage-point decline in state ownership leads to an increase of about RMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average firm is valued at RMB 0.96 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.36 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash.     

Cross country linkages and transmission of sovereign risk: Evidence from China’s credit default swaps

China’s climb to a trading powerhouse has changed its position in the world and therefore its relationships with other economies. As a result, its sovereign credit risk, which we measure by the pricing of its credit default swaps (CDS), now has the potential to greatly impact other sovereign CDS spreads. Employing a dynamic approach, we find that changes in China’s sovereign risk has strong contagion effects on its goods and service providers, while China is vulnerable to contagion effects from its major importers, suggesting sovereign risk spills over to other regions via the global supply chain. China’s success hurts some of the weaker countries in Europe by competing for their customers, while China faces strong competition itself from its export-focused neighbors. FDI and portfolio investment also affect the CDS relationships between China and other economies.     

Labor protection,information disclosure and analyst forecasts: Evidence from China’s Labor Contract Law

Labor protection increases employees’ stability and strengthens their monitoring role, improving firms’ information environment and increasing analysts’ earnings forecast accuracy. Using the implementation of China’s Labor Contract Law as a quasi-natural experiment, we find that labor protection significantly improves analyst forecasts. This positive impact is stronger when agency problems are weaker, board independence is greater, corporate reputation is better and industry competition is more intense. Enhanced labor protection significantly reduces firms’ business risk and accrual-based earnings management, decreases stock price synchronicity and increases market pricing efficiency. Our findings of significant impacts of China’s Labor Contract Law on analysts’ forecasting behaviors offer important guidance for promoting the development of the Chinese capital market and policy making in labor protection.     

China’s Antitrust Policy: Recent Developments and Decision Patterns

Abstract:

In this paper, we review recent antitrust policy developments in China. First, we use a sample of all merger cases reviewed by the Ministry of Commerce (MOFCOM) from August 2008 to September 2012 to provide an econometric analysis of merger review patterns. We find that MOFCOM tends to impose restrictions on mergers involving large corporations and does not distinguish between horizontal mergers and vertical and conglomerate mergers. In addition, European firms and U.S. firms face higher chances of restrictions than do firms from other countries. Finally, we provide a qualitative analysis of the investigations against price agreements.     

Job satisfaction and firm leverage: Evidence from the “China’s Best Employer Award 100” winners

In this study, we examine the relationship between job satisfaction and firm leverage using a sample of Chinese listed firms. We find that in a sample of “China’s 100 Best Employers Award” winners during 2011–2017, job satisfaction is negatively associated with firm leverage. The effect is more pronounced in firms with higher distress risk and operating in human capital intensive industries. We confirm the validity of the main findings using a matched sample and a series of robustness checks. Overall, our results indicate that firms can credibly demonstrate their commitment to stakeholders and re-shape their capital structure by improving job satisfaction.     

China’s Exchange-Rate Regime Reform and Trade Between China and the Eurozone

This article investigates the effects of China’s exchange-rate regime reform on trade between China and the eurozone. Both the exchange rate between the euro (EUR) and the renminbi (RMB) and exchange-rate volatility are included in the autoregressive distributed lag (ARDL) model, and our empirical work also considers the third-country effect. Our findings show that, during the reform period, China’s exports to the eurozone are affected only by the EUR–RMB exchange rate per se and not by its volatility. However, neither the exchange rate nor its volatility significantly influences the eurozone’s exports to China during the reform period. Such asymmetry might be attributed to the discrepancy between Chinese exporters and their eurozone counterparts in the knowledge and ability to manage exchange-rate risk.     

Risk-sharing,market imperfections,asset prices: Evidence from China’s stock market liberalization

We examine the roles of risk-sharing and other factors in stock price revaluation during a recent liberalization episode in China. Consistent with the theoretical prediction that liberalizations reduce systematic risk, we find that risk-sharing explains approximately one-fourth of the price revaluation of investible stocks during the eight-month window between reform announcement and implementation. The firm-specific information generated by the reform is more efficiently priced into stocks that have a higher degree of market liquidity, information transparency, and informed trading.     

China’s Securities reforms and IPO wealth loss

We revisit initial public offering (IPO) underpricing in China before and after the 2001 China Securities Regulatory Commission reforms targeting the IPO process and strengthening corporate governance, using Habib and Ljungqvist’s (2001) wealth loss measure instead of headline underpricing. Habib and Ljungqvist argue that the extent to which owners care about underpricing depends on both headline underpricing and the percentage of IPO shares issued relative to total shares outstanding. We find that in the post-reform period, relative to the pre-reform period, the wealth loss for pre-IPO owners is lower, the incremental effect of the association between wealth loss and state-retained ownership is significantly positive, and a higher proportion of independent directors on the board moderates the wealth loss. Our findings suggest that the more market-oriented IPO process and the corporate governance reforms provide insiders of Chinese IPO firms with greater opportunities to influence IPO pricing and thereby reduce their wealth loss.     

Structural Changes in China’s Import Market: A Comparison with Korea’s Exports to China

The article examines the structural changes of China’s import market for domestic demand and the corresponding structural changes of Korea’s exports to China for Chinese domestic demand. Using 8-digit HS code data covering the period 2006–2014 and analyzing the processing steps as well as by industry, this study reveals that while the share of ordinary trade in total China’s imports has increased rapidly, the share of processing trade has decreased continuously since the mid-2000s. The article also shows that Korea’s exports to China is still processing trade-oriented. The slowdown of Korea’s exports to China is because of the concentration on processing trade, intermediate goods, electronics and chemistry.     

Is China’s Manufacturing Industry Efficient? Evidence from an Energy-Rebound Effect Perspective

Majority of the increase in global energy consumption is from China; hence, studying energy issues, especially in China’s manufacturing industry (CMI), is worthwhile and of much interest in the academic field. Based on the translog cost function, we develop a research framework to study the rebound effect of CMI. Considering the effect of asymmetric energy price, we augment the energy-cost function with asymmetric influence constraint of energy price. Again, we add time series data of CMI’s capital, labor, energy, and mid-input to the model to calculate the direct rebound effect of CMI. We find that the rebound effect of CMI is 44.2%, and CMI still has large energy-conservation potentials. Based on the results of this study, some policy recommendations are provided.     

Asset Pricing and Share Reforms: An Anatomy of China’s Investable Stocks

This paper investigates the impact of China’s 2001–2003 share reforms on its investable stocks’ asset-pricing mechanisms. We show that the reforms have caused the size and dividend effects to attenuate for B shares but not for H/red-chip shares; the book-to-market effect to strengthen for H/red-chip shares but not for B shares; the liquidity effect to lessen more for H/red-chip shares than for B shares; and the earnings-to-price effect to decline for H/red-chip shares but not for B shares. These results have practical implications for investors of China’s investable stocks and for the Chinese companies that issue investable shares.     

Green M&A,legitimacy and risk-taking: evidence from China’s heavy polluters

Green merger and acquisition (M&A) activities may improve heavy polluters’ regulatory and organisational legitimacy, allowing greater access to resources and enhancing risk-taking capacity. Adopting a proprietary 2008–2013 dataset, we examine outcomes from green M&A for China’s heavy-polluting firms. We find that heavy polluters’ green M&A is associated with greater risk-taking. Greater access to resources, and reduced financing constraints and tax liabilities suggest improved legitimacy. These effects are positively related to state ownership and government intervention in the M&A process. Our findings support the Porter hypothesis and have policy implications for green management of heavy polluters in emerging markets.