Narrow Results

This paper investigates the human capital convergence dynamics within China over the period 1985–2018 using a nonlinear dynamic factor model. Our results indicate that there exist multiple human capital clubs, and the heterogeneity between those clusters is increasing over time. Moreover, we detect a core–periphery division with several provinces located in Western, Northeastern, and Southern China being located in lower human capital clubs. Population and transportation density as well as the initial level of human capital appear to be most decisive for determining whether a province is on a high or low human capital development trajectory.

This study examines a possible self-fulfilling vicious circle between China's economic uncertainties and its geopolitical aggressiveness in the post-COVID-19 era. We argue that China's zero-COVID policy during the pandemic exacerbated structural problems in its economy that had gradually surfaced amid the US-China trade war and has resulted in a postpandemic economic rebound that has been weaker than expected if not short-lived. The window of opportunity for realizing the Chinese Dream may therefore be closing for Xi Jinping and the Chinese Communist Party, while they may choose to rely even more on chauvinism to consolidate their legitimacy. This dilemma will push China to adopt a more aggressive posture toward geopolitical issues, raising the likelihood of armed conflict in the Indo-Pacific. Yet, such a posture will inhibit China's domestic consumption and investment, diminish its external trade integration, and blunt its economic statecraft, all of which will combine to increase the downward economic pressure facing Beijing. After demonstrating this vicious circle with empirical data, we offer new insights into China's economic prospects and Indo-Pacific geopolitical changes after the pandemic. We also provide a political economic approach to discussing the future course of US-China rivalry and questions such as whether the two powers will fall into a Thucydides Trap.

Ownership and institutions are regarded as key determinants of firm performance. Using data of Chinese firms from 1998 to 2009, this study tests the separate and interacting effects of ownership and institutions. The divergent performance of firms can be explained from the heterogeneous ownership context, as confirmed by the literature, and through variations in the way that firms of different ownership types use and exploit institutions. Privately owned firms tend to exploit considerably larger benefits from the same institutions in comparison with foreign-owned enterprises (FEs) or state-owned enterprises (SOEs). FEs or SOEs also obtain some benefits; however, these benefits are significantly smaller than those obtained by private enterprises (PEs). Results can be attributed to the differences in the aims and incentives of firms with diverse ownership types. While the initial productivity of PEs may be lower than that of FEs at the low levels of institutional development, PEs are shown to eventually catch up with FEs because institutions develop further over time to be better exploited by PEs than FEs. Hence, any policy design should consider this coevolving nature of institutions and firm ownership; whereas private firms cannot prosper without sound institutions, institutional development may be useless unless there are private firms that can benefit from this institutional development.

This paper investigates how financial discrimination influences skilled-unskilled wage inequality in China. In the basic model, we find that a reduction of financial discrimination will reduce skilled-unskilled wage inequality. In the extended model, we find that skilled-unskilled wage inequality will be narrowed down if and only if the substitution elasticity of unskilled labor and the intermediate product in the private sector is larger than that of the skilled labor and capital in the public sector. When considering the reality of China, we predict that a reduction of financial discrimination leads to the decline of wage inequality.

Major drawbacks of the traditional data envelopment analysis (DEA) method include selecting optimal weights in a flexible manner, lacking adequate discrimination power for efficient decision-making units, and considering only desirable outputs. By introducing the concept of global efficiency optimization, this study proposed a double frontiers DEA approach with undesirable outputs to generate a common set of weights for evaluating all decision-making units from both the optimistic and pessimistic perspectives. For a unique optimal solution, compromise models for individual efficiency optimization were developed as a secondary goal. Finally, as an illustration, the models were applied to evaluate the energy efficiency of the Chinese regional economy. The results showed that the proposed approach could improve discrimination power and obtain a fair result in a case where both desirable and undesirable outputs exist.

Although the extant literature on corporate finance has largely focused on capital investments, relatively less attention has been paid to identify how research and development (R&D) related investments are financed. This study empirically tests the relationship between the different financing sources used by firms and their intensity of R&D in the rapidly growing economy of China. Furthermore, we posit that the firm’s choice to adopt the finance source for R&D will change if the firm is likely to be in financial constraints. This study finds out an empirical evidence that internally generated cash flows, bank debt, and seasonal public offerings (SPOs) stipulate a positive impact on R&D of Chinese firms, whereas the issuance of bond impacts it negatively. The study also confirms that financially constrained firms perceive the impact of financing sources on their R&D differently than non-financially constrained firms do. Results also slightly differ between high-tech and non-high-tech firms.

Learning is a key component of firm upgrading in emerging economies, and China is no exception to this. Studies have identified, among others, two critical mechanisms that facilitate learning: (1) connections with supportive local governments that enhance access to resources or publicly funded knowledge and (2) connections to co-located foreign multinational enterprises (MNEs) that enhance access to advanced knowledge and capabilities. However, previous studies on the effects of these connections on learning and innovation have had contradictory results. In this study, we develop a model of firm innovation capabilities based on regional differences in firms’ dependence on government and MNEs. Using a sample of 715 indigenous firms from the three historically dominant economic regions in China, we find that the effects of government and MNE ties on local firms’ learning and innovation performance vary depending on the historically dominant dependency patterns in the region.

This paper examines the role of reserve requirements as a cheaper substitute for the open-market operations of the People's Bank of China (PBC) to sterilize foreign exchange interventions in recent years. China's reserve requirements have also been used to address a range of other policy objectives, not least macroeconomic management, financial stability, and credit policy. The preference for reserve requirements reflects the size of China's FX sterilization and the associated costs, in a quantity-oriented monetary policy framework faced with policy dilemmas. The PBC often finds it easier to reach a consensus on reserve requirement adjustments than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored not in isolation but in conjunction with other policy actions. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. Reserve requirements, however, impose a tax burden on Chinese banks, albeit the latter seem to have passed through a significant but incomplete portion of these costs to their customers.

This paper examines the impacts of foreign direct investment for the case of China. We focus on the following two main effects that have important impacts on the productivity of factors in the industries: technology spillover and market competition. Technology spillovers, both within the sectors and across sectors from foreign firms to domestic firms, help improve the domestic firms' production, while the inflow of foreign firms tend to drive domestic less productive and smaller firms out of the industries. The departure of these local firms will raise the average firm sizes, affecting the factor productivity of the sectors. Using data of 27 industries in China from 2001 and 2006, we found evidence of within-sector and across-sector technology spillovers. The results also suggest the presence of market competition effects, which for the group of Chinese industries in that period of time were negative.

In China, debates on energy security are diverse and far beyond geopolitical analysis. Findings from the ever-expanding literature indicate two major schools of thought, namely the nationalist and globalist ones, while a pragmatic approach has been prevailing that integrates exploring domestic sources and engaging external actors when needed. The challenges of having to do whatever feasible to meet energy demands and at the same time, pursuing alternatives that reduce its negative impact on human health and environment, have led to growing pluralism in policy advocacy in China. While the two schools of thought on energy security will continue to compete against each other, the argumentative strength of each school shall be conditioned by many factors influencing China’s macro-economic fluctuations in general and energy economies in particular. The Chinese government’s energy policy-making is expected to reflect a dynamic balance between both schools.

China’s economy has entered a “new normal,” transforming from high-speed growth to high-quality development. In the new era, China does not only need to shift its path of development in a timely fashion, but it should also take bigger steps to modernize its economic system. Facing various new demands and challenges, China must make every effort to foster an economic system that features innovation-driven industries, urban-rural and regional coordination, a market economy with socialist characteristics, as well as lasting momentum for opening-up on all fronts. It is expected that despite the economic difficulties at the moment, China will accelerate its economic transformation to achieve high-quality development and make new contributions to the world economy.

The provision of more and better public goods is part of the Chinese efforts to emphasize the quality rather than the quantity of economic growth. Provision of public goods such as education, public health, elderly care, environmental preservation, protection, and restoration, basic research, infrastructure, social safety net, and alleviation of poverty has been vastly expanded in China since the establishment of the People’s Republic of China in 1949, with significant positive results in all these areas. The provision of public goods has also raised the potential GDP of the Chinese economy through its effects on increasing the aggregate demand for investment and consumption, the productivity of the labor force, and the rate of return on other fixed-asset investments.

Public goods are by their very nature mostly “local”, and their provision is consistent with the Chinese “dual-circulation development strategy” with primary focus on domestic circulation. The provision of public goods also constitutes a form of redistribution in kind, e.g., clean air and water, which can be enjoyed by everyone, and hence also directly advances the goal of ”common prosperity”. Despite significant increase in the degree of income inequality in China since the mid-1980s, the welfare of all Chinese people has improved significantly.

However, the provision of public goods frequently results in negative value-added at market prices, and therefore reduces, rather than enhances, the rate of growth of measured GDP. Finally, increasing the provision of public goods can be a significant source of growth of the domestic aggregate demand for both consumption and investment, over and above what increases in household income alone are able to provide. Maintaining an adequate growth of aggregate demand is essential for continued Chinese economic prosperity.

Because China’s economic structure is different from that in OECD countries, using conventional neo-classical competitive trade models to analyze the welfare and trade impacts of trade related policy change can be misleading. In particular, both the exchange rate regime and output and pricing policies of state owned enterprises (SOE’s) will have effects on trade and welfare which differ from a classical competitive model. This paper present a numerical model that captures the combined and interactive effects of three policy elements in prototype form of tariffs, policy towards SOEs in the industrial sector, and an exchange rate regime supporting large trade surpluses and additions to foreign reserves. The model has non neutral monetary features, endogenous trade imbalances and average product pricing of labor in goods. We do not claim it to be fully representative of modern China, but it does go some way beyond simple competitive models used elsewhere and points to different conclusions of policy impact. We calibrate our model to 2006 data, and then evaluate the impacts both singly and in combination of: tariff liberalization, a move to more freely floating exchange rates, and SOE enterprise reform. Results show that large differences in policy have a different impact relative to a classical competitive model. SOE reform and a freely floating Chinese exchange rate have more impact on China’s welfare than tariff liberalization. Policies of RMB appreciation and increasing China’s money stock reduce China’s trade surplus. In the traditional competitive model, trade liberalization impacts both imports and exports, while in our central case model, with endogenously determined trade surplus, trade liberalization has little effect on exports. Most of the policy impact is on imports and the trade surplus. SOE reform of China’s manufacturing sector significantly decreases production of China’s manufacturing sector and increases production in China’s other sectors.

This paper investigates some features of investment-growth nexus in post-reform China with respect to the growth experiences of East Asian economies during similar phase of development. It characterizes the the pattern of investment-driven growth through calculating and decompositing the investment/GDP ratios, examining the sectors and ownerships accounting for incremental change of investments, and analyzing the incremental capital output ratios (ICORs) in real terms, with some comparisons with the NIEs in East Asia. It finds that China had realized its high growth without necessitating an increasing proportion of investment to GDP and without raising ICOR in 1980s. But since mid-1990s China seems to have experienced an excessive expansion of investment as a result of intensified inter-provincial excessive competition.