How would Capital Account Liberalization Affect China＇s Capital Flows and the Renminbi Real Exchange Rates？

In this paper we study the determinants of gross capital flows, project the size of China's international investment position in 2020, and analyze the implications for the renminbi real exchange rate if China liberalizes the capital account. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of the current decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that if the capital account were liberalized, China's gross international investment position would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country's GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment income from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalization as capital flows are expected to be two‐sided. The renminbi real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.     

Putting the Cart before the Horse？ Capital Account Liberalization and Exchange Rate Flexibility in China

I. Introduction and OverviewLike their counterparts in many other emerging market economies, Chinese policymakersare facing a complex set of questions related to the desirability and appropriate mode ofimplementing exchange rate flexibility and capital account liberalization. The Chineseauthorities have stated publicly that both exchange rate flexibility and capital accountconvertibility are their medium-term objectives, but they have resisted recent calls from theinternational community for …     

The Chinese Interbank Markets： Cornerstone of Financial Liberalization

I.IntroductionWell-functioninginterbankmarketsareofutmostimportanceinmodernfinancialsystems.Theirpurposeistoefficientlyallocateliquidityamongfinancialinstitutionsandregions,shiftfundstoinstitutionsandregionsthatneeditmost,andallowforasmoothworkingofthepaymentsystem.1Inmostmodernbankingsystems,depositoryfinancialinstitutionsarelegallyrequiredtomaintainminimumreserves.Duetolargetemporarypayments,individualdepositoryinstitutionsmaybeeitheraboveorbelowtheirrequiredreservepositions.Sincesuchreserv…     

Patterns of Current Account Adjustment��Insights from Past Experience

Theoretical models on trade balance adjustment make a distinction between adjustment led by relative quantities (expenditure reduction) and adjustment led by relative prices (expenditure switching). Using cluster analysis on a set of over 70 current account adjustment episodes, we confirm the empirical relevance of this theoretical distinction, as quantity and price-driven adjustment cases can be distinguished in a statistically meaningful sense. We also identify a group of mixed cases, where both quantities and prices played a significant role in adjustment. Multinomial logit results suggest that economic fundamentals and business cycle positions prior to the adjustment have predictive power over the type of adjustment, i.e. whether the adjustment is quantity?C or price-driven. The exchange rate regime and the level of economic development (emerging market versus advanced status) do not have significant predictive power.     

Publish or perish? A tale of academic publications in Chinese universities

This study examines academic resource (mis)allocation in China by focusing on the correlation between publication in leading economics journals in China and researchers' subsequent academic performance. Our findings demonstrate that researchers with a track record of publication in the most exclusive academic outlets publish more papers in high quality journals, with an average 12.4% increase, as they move up the career ladder, obtain more external grants, and acquire more executive powers. As the observable channels fail to explain most of the publication persistence, the increase in the research productivity along a researcher's career trajectory is attributed to other mechanisms that are suggestive of resource misallocation, including a reputation effect gained from initial visibility in leading academic outlets and non-academic channels facilitated by better access to social resources, among other mechanisms. Our findings depict some intriguing observations regarding the ecosystem of a prominent subject in Chinese academia and reveal tentative evidence on how structural changes, such as fostering a more open and international research environment, could benefit early career researchers.     

Is Violation of the Random Walk Assumption an Exception or a Rule in Capital Markets?

Both the efficient market hypothesis and modern portfolio theory rest on the assumptions of the Gaussian probability distribution and independence of consecutive returns. This paper provides a brief excursion into the history of capital market research. A measure of long-range dependence (Hurst exponent) was applied to daily returns of selected stock indices and individual firms. The Hurst exponent was estimated using rescaled range analysis. The estimates are based on an unusually large sample of empirical-time series from capital markets. This method distinguishes whether the data-generating process follows random walk or exhibits antipersistent or persistent behavior. Both the efficient market hypothesis and modern portfolio theory assume that the data-generating process has no memory, i.e. follows Brownian motion. The random walk process is characterized by a Hurst exponent value of 0.5. Values greater than 0.5 and less than 1 indicate a persistence of local trends. Values between 0 and 0.5 indicate a process that reverts to the mean more often than a random process (mean-reverting process). The results indicated that the series of daily returns exhibit predominantly persistent or antipersistent behavior. Therefore, Brownian motion cannot be perceived as the norm for describing stock market behavior. These findings challenge the assumption of a random walk in stock prices, valuation models and assessment of risk.

     

Direct or indirect? The impact of political connections on export mode of Chinese private enterprises

The learning-by-exporting effect can vary by mode of export (direct or indirect via intermediaries), which raises the importance of understanding factors associated with how firms export. This paper investigates the effect of political connections, one form of informal institutions particularly important in China, on the choice of export mode by Chinese private enterprises. By using firm-level survey data and addressing endogeneity, we find that having political connections significantly increases the probability of direct exporting, while it has no effect on indirect exporting through trade intermediaries. We further test the underlying mechanisms behind these findings. The results show that corporate political connections can help alleviate financial constraints by promoting the (external) access to bank credits and by reducing the (internal) extra-tax burdens, which are disproportionately important for direct exporting relative to indirect exporting. In addition, we find limited evidence supporting the importance of contract enforcement and managerial efficiency as channels though which political connections affect the choice of export mode.     

Fiscal Faux Pas?: An Analysis of the Revenue Implications of Trade Liberalization

This paper examines the argument that trade liberalization depresses tax revenue/GDP ratios in developing countries. This occurs because the structural characteristics associated with developing countries limit their ability to make the transition from trade to domestic taxes. Using a panel of 80 developing and industrialized countries over 1970–98, the econometric analysis carried out employs a fixed-effects regression framework to examine the evidence. The results indicate that low-income and upper middle-income countries have experienced declining tax revenues as a result of falling income and trade tax revenues and that structural characteristics have been significant in explaining the decline.     

Productivity Growth in the Chinese Economy by Industry and the Role of Foreign Capital

I. IntroductionIt is well known that China’s reform and open-up policy initiated in 1978 had an extremelylarge impact on the Chinese economy. This policy represented an about-face against thetraditional self-reconstruction strategy that China had maintained since the founding ofthe people’s Republic in 1949. Although China’s economy temporarily fell into confusionfor a few years after the Tian-an-men incident in 1989, China continued to record high GDPgrowth. Moreover, after Deng Xiao…     

Motivation of Chinese commercial banks to issue green bonds: Financing costs or regulatory arbitrage?

This paper analyzes the reasons for the rapid increase in the scale of green bonds issued by Chinese commercial banks in recent years from the perspective of financing costs and regulatory arbitrage. Our empirical results show that the financing cost mechanism cannot explain this increase since the financing costs of green bonds are not lower than those of non-green financial bonds. Furthermore, commercial banks with low asset liquidity engage in regulatory arbitrage to take advantage of the convenience of green bond financing permission to supplement their liquidity. Our results imply that the regulatory arbitrage mechanism is a very important motivation for commercial banks to issue green bonds. To reduce this motivation and ensure the healthy and sustainable development of the green bond market, green ratings of projects should be linked with financing costs as a way to form a positive feedback incentivizing mechanism for green project financers.     

Does agglomeration promote internationalization of Chinese firms?

Knowledge spillover from the agglomeration of exporters can reduce the initial costs of exporting faced by other firms and thereby facilitate exports. We use a large dataset of Chinese manufacturing firms to assess whether industrial agglomeration lowers the minimum productivity level required for exporting and whether it increases a firm's probability of exporting. Semi-parametric quantile regressions reveal that the productivity advantage of exporters against non-exporters is markedly smaller in agglomerated regions. Furthermore, a parametric estimation of an export entry model indicates that the agglomeration of incumbent exporters contributes significantly to export participation, although its magnitude is limited. These spillover effects are generated not only by the agglomeration of exporting foreign invested firms (FIFs), but also, more importantly, by that of indigenous Chinese exporters. In fact, the agglomeration of exporting FIFs only contributes to the export entry of FIFs.     

False Promise or False Premise? The Experience of Food and Input Market Reform in Eastern and Southern Africa

The literature on the effects of agricultural market reform in Africa is sharply divided and inconsistent. This article attempts to reconcile opposing viewpoints on the effects of food and input market policy reform in eastern and southern Africa. Drawing from studies of Ethiopia, Kenya, Malawi, Zambia, and Zimbabwe, we argue that a major source of the controversy stems from assumptions that countries have actually moved to a liberalized market environment. We find that many of the most fundamental elements of the reform programs either remain unimplemented, were reversed within several years, or were implemented in such a way as to negate private sector investment incentives. A framework is developed for explaining why some countries have been able to liberalize their food and fertilizer markets while others have not. These findings have implications for how donor assistance and policy-oriented research can more constructively contribute to an improved policy environment.     

Who determines Chinese firms' engagement in corruption: Themselves or neighbors?

We investigate the determinants of firm corruption and highlight contagious diffusion of firm corruption under mutual influences of firms' past corrupt history and between peers. The analysis finds that firms' decision-making on engagement in corruption can be affected vertically by their own past experience of bribing bureaucrats and horizontally by the contagion effects of neighbors' observed malfeasance, while there is substantial regional heterogeneity. Moreover, these horizontal contagion effects are nonlinear depending on the distance between neighbors. We also identify three channels underlying “osmosis” of corruption: firms' geographic networks, information exposure, and local marketization. The strongest contagion effect appears in the eastern region, indicating that petty firm corruption can develop into a systematic phenomenon. More practical anti-corruption policies call for cooperation in design and implementation across administrative areas.     

What explains the performance of Chinese exporting firms?

Drawing on the entry mode (EM) literature and the strategic tripod framework, we examine whether firm performance is influenced by its outward foreign direct investment (OFDI) mode, controlling other firm-, industry- and institution-specific factors. It is found that employing OFDI does not improve an exporting firm’s performance. This is not surprising as anecdotal evidence shows that many Chinese firms with OFDI have been making loss in the host country. This may indicate exporting firms employ OFDI to seek complementary and strategic resources/assets, not to improve immediate firm performance. Furthermore, firm performance is influenced by strategic assets, including technology-based capabilities and brands, at the firm level, industry entry barriers at the industry level and the home and host country institutional support at the country level.     

Environmental awareness and household energy saving of Chinese residents: Unity of knowing and doing or easier said than done?

Household energy saving is important for the realization of emission peak, carbon neutrality, and energy security goals in China. However, no conclusion has been reached on whether public environmental awareness can promote household energy saving. There are two major defects in previous studies. One is that they focus on the public intention to save energy rather than the real behavior; the other is that the endogenous problem caused by the measurement bias of environmental awareness is ignored. Based on China Family Panel Studies (CFPS) database, this study selects the change in average monthly household electricity charge and electricity consumption as the proxy variables of energy saving, and introduces the public perception level of social security and government corruption as the instrumental variable of environmental awareness. It is found that improvement of environmental awareness has statistical significance for household energy saving and there is still a lot of room for improvement. This conclusion keeps valid in several robustness tests. Further analysis shows that improvement of environmental awareness is more likely to promote energy saving in rural households, male household heads, and young people; and that education and income have a joint moderating effect on the energy saving effect of environmental awareness.     

To upgrade or to relocate? Explaining heterogeneous responses of Chinese light manufacturing firms to rising labor costs

This paper studies the heterogeneous responses of Chinese light manufacturing firms to rising labor costs from the perspective of New Structural Economics. Using the first-hand pilot survey data, we find that rising labor costs have been the number one challenge facing firms, and that despite the dominant strategy of technological upgrading, there is a substantial difference in responses across different firms. In addition, we discover that industrial and firm-specific labor intensity are key determinants of the heterogeneous strategies across firms in response to rising labor costs. We conclude that intrinsically more labor-intensive industries and firms are more likely to choose relocation instead of upgrading as a strategy to cope with the rising labor costs.     

How to Evaluate and Enhance the Effectiveness of Capital Control in China?

China's accession to the World Trade Organizationwill make it more difficult for the country to re-strict the flow of international capital.However,it doesnot necessarily mean China will lose its effectivenessin maintaining capital control.In this paper,we pro-pose a framework to evaluate the effectiveness ofChina's efforts in that endeavor.