A Critical Time for Economic Research
Over the past three decades, China has experienced a period of unparalleled, historic change. The country’s economic growth has been nothing less than astonishing, with per capita income increasing by 900 percent since 1990, lifting hundreds of millions of people out of poverty and into the global middle class. Today, China is the world’s second-largest economy and leading manufacturer, an economic leader whose markets are increasingly globally integrated and whose companies are among the world’s most innovative and dynamic. Despite this progress, Chinese policymakers now confront a set of complex challenges as they seek to catalyze a second economic transformation that ushers in a new era of sustainable growth. How can China’s government and financial institutions, which have been a critical element of its unique economic success, evolve to become more efficient? What is the future of Chinese financial markets? And how can China maintain access to the affordable energy needed to power growth without suffering the effects of dangerously high levels of pollution?
A World-Class Research Effort
The Becker Friedman Institute for Economics at the University of Chicago (BFI) serves as a platform for the dynamic University of Chicago economics community. Uniting faculty from the Booth School of Business, the Kenneth C. Griffin Department of Economics, the Harris School of Public Policy, and the Law School, BFI supports new research that expands society’s understanding of economic challenges and identifies solutions. Working in close partnership with Chinese researchers and research institutions, BFI aims to develop new insights on the critical economic issues facing Chinese policymakers today. The vehicle for this ambitious effort is BFI-China, a first-of-its kind effort to support University of Chicago economists with research interests in China and to create new opportunities for expanding the world-class community of scholars producing new research focused on the Chinese economy. To support research that produces timely, relevant insights, BFI-China is organized around three targeted research initiatives. Each one of these initiatives will draw from unparalleled skills, knowledge, and expertise of University of Chicago faculty working in collaboration with Chinese institutional partners.
Tsinghua University-University of Chicago Joint Research Center for Economics and Finance
Established in 1911, Tsinghua University is one of China’s most prestigious and influential universities, with a tradition of academic excellence and strong international partnerships. On November 28, 2018, BFI was proud to announce a new collaboration with Tsinghua University’s School for Economics & Management to form the Joint Research Center for Economics and Finance. The Research Center is a first-of-its-kind collaboration that will support frontier economics research, faculty and doctoral student exchanges, and regular workshops and forums to share results and discuss areas of mutual interest.
Lars Peter Hansen
Zheng Michael Song
Chong-En Bai is Mansfield Freeman Chair Professor, Dean of the School of Economics and Management of Tsinghua University. He is also the Director of the National Institute for Fiscal Studies of Tsinghua University. He earned his Ph.D. degrees in Mathematics and Economics from UCSD and Harvard University, respectively. His research areas include Institutional Economics, Economic Growth and Development, Public Economics, Finance, Corporate Governance and Chinese Economy.
Research on the impact of institutional environment on the development of the service sector won the Inaugural Pu Shan-Bank of China best paper award given by China Society of World Economics in 2008. Research on the return to investment won the Sun Yefang Best Economics Paper Award in 2009. Study on the model of national income distribution and its reform was funded by the National Planning Office of Philosophy and Social Sciences Major Grant. Research on the national income distribution won the Zhang Pei-Gang Award for Outstanding Achievements in Development Economics in 2012. Study on the challenges to and the measures for the development of the service sector in China won the second Prize for Excellent Research in Humanities and Social Sciences in the Category of Research Report in Economics, awarded by the Ministry of Education of China. Study on the relation between health insurance and consumption won the second Prize for Excellent Research in Humanities and Social Sciences in the Category of Research Paper, awarded by the Ministry of Education of China. Research on explaining China’s economic slowdown in the wake of the global financial crisis from the perspective of productivity won the Sun Yefang Best Economics Paper Award in 2016.
Professor Bai is a member of the executive committee of International Economic Association, and of the Scientific Council of the Barcelona Graduate School of Economics. He currently serves on the editorial board of a few top economic journals in China. He also served on the editorial board of Journal of Comparative Economics from 2004 to 2006 and of The World Bank Economic Review from 2006 to 2008 as well as from 2011 to 2013.
Professor Bai is a member of the National Committee of the Chinese People’s Political Consultative Conference, the “14th Five-Year Plan” National Development Planning Expert Committee, the Chinese Economists 50 Forum, the China Finance 40 Forum, and Chinainfo 100. He was a member of the monetary policy committee of the People’s Bank of China from 2015 to 2018. He served as Adjunct Vice-President of Beijing State-Owned Assets Management Co., Ltd. from August 2011 to December 2012. He was a non-resident Senior Fellow of the Brookings Institution from 2006 to 2007.
Michael Greenstone is the Milton Friedman Distinguished Service Professor in Economics, the College, and the Harris School, University of Chicago Director, Becker Friedman Institute for Research in Economics (BFI) and Energy Policy Institute at the University of Chicago (EPIC). He previously served as the Chief Economist for President Obama’s Council of Economic Advisers, where he co-led the development of the United States Government’s social cost of carbon, and on the Secretary of Energy’s Advisory Board. Greenstone also directed The Hamilton Project, which studies policies to promote economic growth, and has since joined its Advisory Council. He is an elected member of the American Academy of Arts and Sciences, a fellow of the Econometric Society, and a former editor of the Journal of Political Economy. Before coming to the University of Chicago, Greenstone was the 3M Professor of Environmental Economics at MIT.
Professor Greenstone’s research, which has influenced policy globally, is largely focused on uncovering the benefits and costs of environmental quality and society’s energy choices. His current work is particularly focused on testing innovative ways to increase energy access and improve the efficiency of environmental regulations around the world. Additionally, he is producing empirically grounded estimates of the local and global impacts of climate change as a co-director of the Climate Impact Lab. He also created the Air Quality Life Index™, which provides a reliable measure of the potential gain in life expectancy communities could see if their particulates air pollution concentrations are brought into compliance with global or national standards. Greenstone’s research suggests that particulates air pollution is the greatest current environmental threat to human wellbeing.
Professor Greenstone received a Ph.D. in economics from Princeton University and a BA in economics with High Honors from Swarthmore College.
Lars Peter Hansen is a leading expert in economic dynamics who works at the forefront of economic thinking and modeling, drawing approaches from macroeconomics, finance, and statistics. He is a recipient of the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Professor Hansen has made fundamental advances in our understanding of how economic agents cope with changing and risky environments. He has contributed to the development of statistical methods designed to explore the interconnections between macroeconomic indicators and assets in financial markets. These methods are widely used in empirical research in financial economics today.
The Nobel Prize recognizes this work, which has been used to test theories and models that have shaped our modern understanding of asset pricing. His recent research explores how to quantify intertemporal risk-return tradeoffs and ways to model economic behavior when consumers and investors struggle with uncertainty about the future. Improving models that measure risk and uncertainty have important implications for financial markets, fiscal policy, and the macroeconomy.
His early research in econometrics was aimed at developing time series statistical methods to investigate one part of an economic model without having to fully specify and estimate all of the model ingredients. The applications he explored with several coauthors, such as Kenneth J. Singleton, Scott F. Richard, Robert Hodrick, and Ravi Jagannathan, included systems that are rich enough to support models of asset valuation and to identify and clarify empirical puzzles, where real-world financial and economic data were at odds with prevailing academic models.
Professor Hansen’s recent work focuses on uncertainty and its relationship to long run risks in the macroeconomy. He explores how models that incorporate ambiguities, beliefs, and skepticism of consumers and investors can explain economic and financial data and reveal the long-term consequences of policy options. Hansen, Thomas J. Sargent, and their coauthors have recently developed methods for modeling economic decision-making in environments in which uncertainty is hard to quantify. They explore the consequences for models with financial markets and characterize environments in which the beliefs of economic actors are fragile.
Professor Hansen joined the faculty of the University of Chicago’s Department of Economics in 1981 and has served as department chairman and director of graduate studies. He is now David Rockefeller Distinguished Service Professor of Economics, Statistics, Booth School of Business and the College. He was the inaugural director of the Becker Friedman Institute until July of 2017. He currently directs the Macro Finance Research Program housed under the Becker Friedman Institute.
Hansen also serves as co-principal investigator, along with Andrew Lo of MIT, on the Macro Financial Modeling Project (MFM). This research group works to develop macroeconomic models with enhanced linkages to financial markets, with the aim of providing better policy tools for monitoring so-called systemic risks to the economy.
In addition to the Nobel prize, Hansen has also received many other awards and honors. Hansen won the 2010 BBVA Foundation Frontiers of Knowledge Award in the Economics, Finance and Management “for making fundamental contributions to our understanding of how economic actors cope with risky and changing environments.” He also received the CME Group-MSRI Prize in Innovative Quantitative Applications in 2008 and the Erwin Plein Nemmers Prize in Economics from Northwestern University in 2006. In 1984, he and Kenneth J. Singleton were awarded the Frisch Medal from the Econometric Society for their paper, “Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models.”
Professor Hansen is a fellow of the National Academy of Sciences and the American Finance Association. He also is a member of the American Academy of Arts and Sciences and past president of the Econometric Society.
Professor Hansen holds a bachelor’s degree in mathematics and political science from Utah State University and a doctorate in economics from the University of Minnesota. Hansen has also received numerous honorary degrees, including an honorary doctorate from Utah State University in 2012.
Zhiguo He is interested in the implications of agency frictions and debt maturities in financial markets and macroeconomics with a special focus on contract theory and banking. His recent research focuses on the role of financial institutions in the 2007/08 global financial crisis. He is also actively conducting academic research on Chinese financial markets that have been undergoing rapid development, including the stock market, local government debt, shadow banking, and interbank markets together with recent regulation changes; in relation to this research, he teaches a newly created elective MBA course, “Chinese Economy and Financial Markets.” Besides research in Chinese financial markets, he has also been writing academic articles on new progress in the area of cryptocurrency and blockchains. His research has been published in leading academic journals including the American Economic Review, Econometrica, the Review of Economic Studies, the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics. He has been an associate editor for the Review of Financial Studies and Management Science and currently serves as an associate editor for the Journal of Finance.
Professor He received his bachelor and master degrees from the School of Economics and Management at Tsinghua University before receiving his PhD from the Kellogg School of Management at Northwestern University in 2008. He has been named a 2014 Alfred P. Sloan Research Fellow, and has won numerous awards for his outstanding scholastic record, including the Lehman Brothers Fellowship for Research Excellence in Finance in 2007, the Swiss Finance Institute Outstanding Paper Award in 2012, the Smith-Breeden First Prize in 2012, and the Brattle Group First Prize in 2014. In autumn 2015 he was the dean’s distinguished visiting scholar at Stanford University, Graduate School of Business and in winter 2020 he will be a visiting professor of finance at Yale University, School of Management. Before joining the Chicago Booth faculty in 2008, he worked as a stock analyst at the China International Capital Corporation in Beijing in 2001 and visited the Bendheim Center for Finance at Princeton University as a post-doctoral fellow.
Chang-Tai Hsieh conducts research on growth and development. Hsieh has published several papers in top economic journals, including “The Life-Cycle of Plants in India and Mexico,” in the Quarterly Journal of Economics; “Misallocation and Manufacturing TFP in China and India,” in the Quarterly Journal of Economics; “Relative Prices and Relative Prosperity,” in the American Economic Review; “Can Free Entry be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry,” in the Journal of Political Economy; and “What Explains the Industrial Revolution in East Asia? Evidence from the Factor Markets,” in the American Economic Review.
Professor Hsieh has been a visiting scholar at the Federal Reserve Banks of San Francisco, New York, and Minneapolis, as well as the World Bank’s Development Economics Group and the Economic Planning Agency in Japan. He is a Research Associate for the National Bureau of Economic Research, a Senior Fellow at the Bureau for Research in Economic Analysis of Development, and a member of the Steering Group of the International Growth Center in London.
He is the recipient of an Alfred P. Sloan Foundation Research Fellowship, an Elected Member of Academia Sinica, and the recipient of the Sun Ye-Fang award for research on the Chinese economy.
Zheng Michael Song is a Professor at the Department of Economics of the Chinese University of Hong Kong (CUHK) and a Distinguished Visiting Professor at Tsinghua University. Before joining CUHK, he was an Associate Professor of Economics at Chicago Booth. Professor Song is a co-editor of China Economic Review and an associate editor of Journal of European Economic Association. He is an academic committee member of China’s National Economics Foundation and an executive board member of the Association for Comparative Economic Studies. His research focuses on Chinese economy and macroeconomics. His papers appear on leading academic journals including American Economic Review and Econometrica. In 2013, he won Sunyefang Economic Science Award.
Dr. Kevin Mo is the Senior Director of the University of Chicago’s Energy Policy Research Institute in China (EPIC China) and Senior Advisor to Becker Friedman Institute China (BFI China). He is also Managing Director of the Paulson Institute Representative Office. He has more than 25 years of experience in strategizing and implementing climate and energy policies in both the U.S. and China. He is a frequent speaker on energy policies and sustainable development at international conferences and workshops. Dr. Mo was the director of Energy Foundation’s China Buildings Program, a project director at Natural Resources Defense Council, a research engineer at Maryland-based NAHB Research Center and a lecturer at Tsinghua University.
Dr. Mo is a board director of World Green Building Council, an advisor to the U.S. team in the US-China Clean Energy Research Center’s Building Energy Efficiency Consortium. He was elected to the Top 10 Green Motivators in 2017 by China Real Estate News. He won the EEBA 25th Anniversary Legacy Award in 2007 by managing a U.S. Department of Energy’s energy efficiency award program. At Tsinghua University, he won the 2nd Science and Technology Progress Award from China’s Ministry of Culture in 1995.
He received his Ph.D. from Carnegie Mellon University, a master’s degree from Tsinghua University and a bachelor’s degree from Zhejiang University.
Xing Huang is the Associate Director of Policy Research, Climate and Sustainable Urbanization based in the Paulson Institute Representative Office in Beijing. In this role, Xing helps to lead research and policy studies from inception to publication. He formulates and recommends sound policies on climate and sustainable urbanization for central and local governments.
Prior to joining the Paulson Institute, Xing worked at the National Energy Conservation Center, an affiliate of the NDRC, where he was responsible for policy research, consultation, and evaluation related to energy conservation, emission reduction, and environmental protection. Xing participated in the drafting and promotion of multiple energy-related regulations including their supporting guidelines and technical standards. Following graduation, he worked at the North China Power Engineering Co. where he acquired professional technical experience in energy industry. Xing has held concurrent posts as a commissioner in several energy-related standardization commissions.
Xing has a master’s degree in thermal engineering from North China Electric Power University.
The Macroeconomy and Finance in China Conference
The interplay between finance and macroeconomics in China provides a fascinating opportunity for new research. While financial markets are still fast growing and expanding their territory in China, the Chinese economy has been very innovative in advancing financial technologies. The special role of the Chinese government at both the local and national levels in financial activities has broad-reaching implications for macroeconomic performance and growth prospects in the future. This conference brought together elite scholars to explore the extent of our current understanding and the challenges for future research related to Chinese financial markets and their applications more broadly.
In the News
The dynamic growth of China’s economy in recent decades has raised many questions among economists about the nature of this progress, including the role of markets and the state, and the sometimes contentious but often symbiotic relationship between the two. A recent forum featuring Chinese private sector executives and government officials, along with Chinese and US economists, explored these and other topics, as part of a major conference at Tsinghua University School of Economics and Management (Tsinghua SEM) in Beijing, organized by the Macro Finance Research Program (MFR) of the Becker Friedman Institute (BFI) for Economics at the University of Chicago.
“Discussions like this, which bring together members of the private sector, government, and researchers, are extremely important as China looks to address complicated policy challenges,” said Lars Peter Hansen, 2013 Nobel laureate in Economics and professor of economics at the University of Chicago, and forum moderator. “Information sharing is crucial to good policy outcomes, and such events, as well as the relationship between Tsinghua and the Becker Friedman Institute, can help facilitate a useful exchange of ideas and information,” Hansen said.
The broader conference was an effective example of such an exchange, according to Zhiguo He, Fuji Bank and Heller Professor of Finance at the University of Chicago’s Booth School of Business. “This first joint academic conference between Tsinghua and BFI was a complete success and bodes well for the future,” He said. “The papers were insightful and the discussion was challenging, exactly what you expect when you bring together top researchers from China and around the world.”
Titled “Challenges in Finance and the Macroeconomy in China,” the Dec. 12, 2019, forum was sponsored by Harvest Fund Management Co., Ltd. In addition to Hansen, the forum featured
Xiao Gang, member of the 13th CPPCC National Committee and former chairman of the China Securities Regulatory Commission; Thomas Sargent, 2011 Nobel laureate in Economics and professor of economics at New York University; Xu Chenggang, professor of economics at Cheung Kong Graduate School of Business; and Zhao Xuejun, chairman of Harvest Fund.
The forum addressed three broad themes—growth, financial markets, and the environment—that are related to BFI’s new China-focused research program (BFI-China): the Chinese Economic Growth Initiative (CEGI), the Macro Finance Research Program (MFR-China), and the Energy Policy Institute at the University of Chicago, China (EPIC-China). The following summary provides forum highlights.
On the question of how best to encourage economic growth, Sargent began the discussion by recounting three targets from the China’s 2013 Reform Plan, and asserting that such goals were important for any economy: markets should play a decisive role in the allocation of resources; interest rate liberalization should occur, also via markets; and all natural monopolies should be eliminated.
While China may be striving for those targets, Sargent suggested that China could learn from the United States, a country with an economy and financial markets that have been influenced by market forces for generations. However, rather than touting the United States as a positive example, Sargent sounded a cautionary note about the current state of the US economy. Citing the work of the French economist Thomas Philippon, Sargent warned about rising market concentration within certain industries, the increasing gap between profit share and labor share, and the decrease in productivity growth and in the amount of R&D investment. As a final warning to China about challenges seemingly inherent in the United States, Sargent noted the increasing influence of lobbying and the negative effects such rent-seeking can have on competition.
Regarding China’s growth potential, Xu Chenggang noted that China’s household consumption rate is far below averages of developed nations, due in large part to the high share of national income held by the government. This raises a fundamental tension between consumers and the Chinese government, according to Xu, an issue not easily resolved and one that will likely persist as a near-term drag on the Chinese economy. Further, China’s high growth rates in the first decade of the 21st century were largely fueled by an export-driven economy, Xu said, but those growth opportunities have largely subsided. This means that those same households that are facing constraints on consumption will become increasingly important for China’s growth prospects.
As a means to fuel growth, Xu noted the importance of developing cutting-edge technologies. However, echoing Sargent’s retelling of China’s Reform Plan, Xu stressed that Chinese industry should not become too dependent on government subsidies, but should rather allow market competition to drive innovation and productivity.
The essential difference, other than size, between Chinese and US financial markets is that those in the US are more transparent and efficient, said Zhao Xuejun, and both of those features should be goals of Chinese markets. In the US, he said, when a company discloses information, everyone—from the private sector to the government—is aware of all of the information at the same time. In China, though, the opposite is true: some players know more than others at different times. This opacity of information makes reform difficult, Zhao said, and he likened the process to “crossing the river by feeling the stones under water.” In other words, financial market reform will be marked by trial-and-error, and will not come easy.
Xu added that firms in China do not face the consequences of poor performance as they would, say, in the US. In China, failing firms are buttressed by the government and, likewise, the Chinese economy does not benefit from the churning that would occur within a freer market system. To build a better financial market means that financial regulation needs to reform, Xu said. However, in China, financial regulation is intertwined with the law enforcement mechanism, and an independent judicial system does not exist. Therefore, in order for financial regulation to play a proper role in shaping more efficient financial markets in China, the country’s judicial system—especially regarding the security law and its enforcement—must be reformed.
Regarding the role of government in financial markets, Xiao Gang said that the goal of government regulation is to maintain transparent, fair, and equitable markets and improve its transparency. The key to national supervision is to draw a clear line between supervision and regulation, so as to give play to the constructive role of supervision authorities while respecting the principle of market participants. On the future of China’s stock market, Xiao said that the goal proposed by the Chinese government for China’s stock market is to promote its gradual marketization, legalization, and internationalization. The proportion of foreign capital is still relatively low, so there is still much room for further opening-up. At the same time, Xiao stressed, more foreign investment will bring new challenges to the Chinese market, mainly in the form of increased impact on market volatility.
Hansen motivated the discussion about the environment by refocusing on a core issue informing the forum—the relationship between markets and the government. What is the role of the government vs. investment and entrepreneurial opportunities to address climate change and to develop new technologies that efficiently deliver clean energy? As Hansen noted, this is a big question for the United States and all countries, not just China.
Sargent began by suggesting that this was not an either/or proposition, but that perhaps the two forces, government and markets, working in tandem could effect change. He noted examples of government setting incentives to deliver outcomes; for example, offering prize money to solve technical problems or to spur innovation. He also noted that China has led the way in the development of certain renewable energy platforms, like those involving wind power.
Xu was sanguine about the government’s potential role in advancing sustainable energy outcomes, noting that government is rarely effective at advancing “technology on the frontier,” and frontier technology is exactly what is needed. As with financial markets, Xu warned about a reliance on subsidies as they may only serve to distort markets and, potentially, steer them in an inefficient direction.
Hansen closed the forum by acknowledging the frank exchange of ideas among the panel members, and stressed the importance for such dialogue to continue. “All of our work, from academia, the government, and the private sector, is made more effective when there are open lines of communication,” Hansen said, following the forum. “For academic scholars like me, there is great value to understanding both private and public sector perspectives to help direct research toward important questions that will have a real long-term impact. Policymakers similarly benefit from insights from the best scholarly research, while the private sector gains from advances in knowledge and understanding generated from academic environments.”
CONFERENCE FUNDED BY
Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets
Mitigating the Air Pollution Effect? The Remarkable Decline in the Pollution-Mortality Relationship in Hong Kong
Straw Burning, PM2.5 and Death: Evidence from China
Winter Heating, Air Pollution, and Acute Health Impact: Evidence from a Regression Discontinuity Design
Expressways, GDP, and the Environment: A Case of China
The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes
Special Deals with Chinese Characteristics
Structured Uncertainty and Model Misspecification
A Forensic Examination of China’s National Accounts
Handbook on China’s Financial System: Chinese Bond Market and Interbank Market
Leverage-Induced Fire Sales and Stock Market Crashes
AQLI Update: Is China Winning its War on Pollution?
Leveraging Political Incentives for Environmental Regulation: Evidence from Chinese Manufacturing Firms
Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China
New evidence on the impact of sustained exposure to air pollution on life expectancy from China’s Huai River Policy
Particulate Air Pollution and Mortality in 38 of China’s Largest Cities: Time-Series Analysis
The Long Shadow of a Fiscal Expansion
Surface Water Pollution and Infant Mortality in China
The Effect of Air Pollution on Mortality: Evidence from the 2008 Beijing Olympic Games
Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China
Growth, Pollution, and Life Expectancy: China from 1991-2012
Evidence on the Impact of Sustained Exposure to Air Pollution on Life Expectancy from China’s Huai River Policy
We provide causal evidence for the value of asset pledgeability. Our empirical strategy is based on a unique feature of the Chinese corporate bond markets, where bonds with identical fundamentals are simultaneously traded on two segmented markets that feature diﬀerent rules for repo transactions. We utilize a policy shock on December 8, 2014, which rendered a class of AA+ and AA bonds ineligible for repo on one of the two markets. By comparing how bond prices changed across markets and rating classes around this event, we estimate that an increase in haircut from 0 to 100% would result in an increase in bond yields in the range of 40 to 83 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.
Using transboundary pollution from mainland China as an instrument, we show that air pollution leads to higher cardio-respiratory mortality in Hong Kong. However, the air pollution effect has dramatically decreased over the past two decades: before 2003, a 10-unit increase in the Air Pollution Index (API) could lead to a 3.1% increase in monthly cardio-respiratory mortality, but this effect has reduced to 0.5% using recent data and become statistically insignificant. Exploratory analyses suggest that a well-functioning medical system and immediate access to emergency services can help mitigate the contemporaneous effects of pollution on health.
This study uses satellite data to detect agricultural straw burnings and estimates its impact on air pollution and health in China. We find that straw burning increases particulate matter pollution and causes people to die from cardio-respiratory diseases. Middle-aged and old people in rural areas are particularly sensitive to straw burning pollution. We estimate that a 10µg/m3 increase in PM2.5 will increase mortality by 3.25%. Subsidizing the recycling of straw brings significant health benefits and is estimated to avert 21,400 pre-mature deaths annually.
China’s coal-fired central heating systems generate large amounts of hazardous emissions and significantly deteriorate air quality. In a regression discontinuity design based on the starting dates of winter heating, we estimate the acute health impacts of winter heating and air pollution. We find that a 10-point increase in the weekly Air Quality Index will cause a 4% increase in mortality. People in poor and rural areas are particularly vulnerable to this sudden air quality deterioration, suggesting that the health impacts of air pollution can be mitigated by better socio-economic conditions. Exploratory cost-benefit analysis suggests that replacing coal with natural gas for heating can improve social welfare.
In a matched difference-in-differences setting, we show that China’s expressway expansion helps poor rural counties grow faster in GDP while slowing the rich rural counties down. This heterogeneity is not driven by factors about initial market access, factor endowments, or sectoral patterns; however, it is consistent with the Chinese government’s development strategy that relatively more developed regions prioritize environmental quality over economic growth, while poor regions pursue the opposite. We document that expressway connection indeed makes poor counties adopt dirtier technologies, host more polluting firms, and emit more pollutions, contrary to what happens to the rich connected counties. These results imply that recognizing the GDP–environment trade-off can help understand the full implications of infrastructure investment and other development initiatives.
The upsurge of shadow banking is typically driven by rising financing demand from certain real sectors. In China, the four-trillion-yuan stimulus package in 2009 was behind the rapid growth of shadow banking after 2012, expediting the development of Chinese corporate bond markets in the post-stimulus period. Chinese local governments financed the stimulus through bank loans in 2009, and then resorted to non-bank debt financing after 2012 when faced with rollover pressure from bank debt coming due. Cross-sectionally, using a political-economy-based instrument, we show that provinces with greater bank loan growth in 2009 experienced more municipal corporate bond issuance during 2012–2015, together with more shadow banking activities including Trust loans and wealth management products. China’s post-stimulus experience exhibits similarities to financial market development during the U.S. National Banking Era.
Chinese local governments wield their enormous political power and administrative capacity to provide “special deals” for favored private firms. We argue that China’s extraordinary economic growth comes from these special deals. Local political leaders do so because they derive personal benefits, either political or monetary, from providing special deals. Competition between local governments limits the predatory effects of special deals.
An ambiguity averse decision maker evaluates plans under a restricted family of what we call structured models and unstructured alternatives that are statistically close to them. The structured models can include parametric models in which parameter values vary over time in ways that the decision maker cannot describe probabilistically. Because he suspects that all parametric models are misspecified, the decision maker also evaluates plans under alternative probability distributions with much less structure.
China’s national accounts are based on data collected by local governments. However, since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics. China’s National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level. The adjustments made by the NBS average 5% of GDP since the mid-2000s. On the production side, the discrepancy between local and aggregate GDP is entirely driven by the gap between local and national estimates of industrial output. On the expenditure side, the gap is in investment. Local statistics increasingly misrepresent the true numbers after 2008, but there was no corresponding change in the adjustment made by the NBS. Using publicly available data, we provide revised estimates of local and national GDP by re-estimating output of industrial, construction, wholesale and retail firms using data on value-added taxes. We also use several local economic indicators that are less likely to be manipulated by local governments to estimate local and aggregate GDP. The estimates also suggest that the adjustments by the NBS were insufficient after 2008. Relative to the official numbers, we estimate that GDP growth from 2010-2016 is 1.8 percentage points lower and the investment and savings rate in 2016 is 7 percentage points lower.
Over the past twenty years, especially the past decade, China has taken enormous strides to develop its bond market as an integral step of financial reform, along with its tremendous effort in interest rate liberalization and internalization of its currency RMB. Due to historical reasons, there are two distinct and largely segmented markets in today’s Chinese bond markets: Over-the-Counter based interbank market, and centralized exchange market. The interbank bond market in China resembles the interbank market observed in developed countries like U.S., while the exchange bond market in China is part of the Stock Exchanges in Shanghai and Shenzhen. Section 4.2 offers a brief history of the development and evolution of these two bond markets. The interbank market is the dominant one within these two markets; at the end of 2018, about 89% of the total bonds outstanding in China are in the interbank market, while the rest of 11% is in the exchange. Various fixed income securities are issued and traded on these two bond markets, with many multi-layer regulatory bodies interacting with each other in an intricate way. We first elaborate on the above mentioned two bond markets in Section 2, together with various bond instruments traded there. Section 3 provides a brief history of Chinese bond markets, and Section 4 highlights their inherent connection with and the banking system, together with the internalization of Chinese bond markets in the near future. Section 5 covers the credit ratings and rating agencies, and Section 6 offers an account of ever-rising default incidents in China starting 2014. We provide some data sources for in-depth study of Chinese bond market in Section 7.
We provide direct evidence of leverage-induced fire sales contributing to a market crash using account-level trading data for brokerage- and shadow-financed margin accounts during the Chinese stock market crash of 2015. Margin investors heavily sell their holdings when their account-level leverage edges toward their maximum leverage limits, controlling for stock-date and account fixed effects. Stocks that are disproportionately held by accounts close to leverage limits experience high selling pressure and abnormal price declines which subsequently reverse. Unregulated shadow-financed mar-gin accounts, facilitated by FinTech lending platforms, contributed more to the crash despite their smaller asset holdings relative to regulated brokerage accounts.
Four years after Chinese Premier Li Keqiang declared a “war against pollution,” has the government delivered on its promises to improve air quality? Using daily data from more than 200 monitors across the country from 2013 to 2017, we find that China’s most populated areas have experienced remarkable improvements in air quality, ranging from 21 to 42 percent, with most meeting or exceeding the goals outlined in their National Air Quality Action Plan. If these reductions in pollution are sustained, the average Chinese citizen would see their life expectancy increase by 2.4 years relative to 2013. Although China faces a long road ahead to reach national and international air quality standards, these results suggest the country is winning its war on pollution.
This paper estimates the effect of environmental regulation on firm productivity using a spatial regression discontinuity design implicit in China’s water quality monitoring system. Because water quality readings are important for political evaluations, and the monitoring stations only capture emissions from their upstream regions, local government officials are incentivized to enforce tighter environmental standards on firms immediately upstream of a monitoring station, rather than those immediately downstream. Exploiting this discontinuity in regulation stringency with novel firm-level geocoded emission and production datasets, we find that upstream polluting firms face a 27% reduction in Total Factor Productivity (TFP), and a 48% reduction in emission intensity, as compared to their downstream counterparts. We find that the discontinuity in TFP does not exist in non-polluting industries, only emerged after the government explicitly linked political promotion to water quality readings, and was entirely driven by prefecture cities with career-driven leaders. Linking the TFP estimate with the emission estimate, a back of the envelope calculation indicates that China’s current water-pollution abatement target leads to an annual economic loss of more than 30 billion dollars.
Award: Gregory Chow Best Paper Award, Chinese Economists Society, 2018
Journal of Political Economy, forthcoming
(Working Paper, 2016)
We develop a framework to estimate willingness to pay (WTP) for clean air from defensive investments on differentiated products. Applying this framework to scanner data on air purifier sales in China, we find that households are willing to pay $1.34 per year to remove 1 µg/m3 of PM10 and $32.7 per year to eliminate policy-induced air pollution created by the Huai River heating policy. Substantial heterogeneity in WTP is explained by household income and exposures to media coverage on air pollution. Using these estimates, we examine welfare implications of existing and counterfactual environmental policies in China.
Proceedings of the National Academy of Sciences
This paper finds that a 10-μg/m3 increase in airborne particulate matter [particulate matter smaller than 10 μm (PM10)] reduces life expectancy by 0.64 years (95% confidence interval = 0.21–1.07). This estimate is derived from quasiexperimental variation in PM10 generated by China’s Huai River Policy, which provides free or heavily subsidized coal for indoor heating during the winter to cities north of the Huai River but not to those to the south. The findings are derived from a regression discontinuity design based on distance from the Huai River, and they are robust to using parametric and nonparametric estimation methods, different kernel types and bandwidth sizes, and adjustment for a rich set of demographic and behavioral covariates. Furthermore, the shorter lifespans are almost entirely caused by elevated rates of cardiorespiratory mortality, suggesting that PM10 is the causal factor. The estimates imply that bringing all of China into compliance with its Class I standards for PM10 would save 3.7 billion life-years.
Yin, Peng, Guojun He, Maoyong Fan et al.
The BMJ, 2017, 356: j667.
Objectives: To estimate the short term effect of particulate air pollution (particle diameter <10 μm, or PM10) on mortality and explore the heterogeneity of particulate air pollution effects in major cities in China
Design: Generalised linear models with different lag structures using time series data.
Setting: 38 of the largest cities in 27 provinces of China (combined population >200 million)
Participants: 350,638 deaths (200,912 in males, 149,726 in females) recorded in 38 city districts by the Disease Surveillance Point System of the Chinese Center for Disease Control and Prevention from 1 January 2010 to 29 June 2013.
Main outcome measure: Daily numbers of deaths from all causes, cardiorespiratory diseases, and non-cardiorespiratory diseases and among different demographic groups were used to estimate the associations between particulate air pollution and mortality.
Results: A 10 µg/m3 change in concurrent day PM10 concentrations was associated with a 0.44% (95% confidence interval 0.30% to 0.58%) increase in daily number of deaths. Previous day and two day lagged PM10 levels decreased in magnitude by one third and two thirds but remained statistically significantly associated with increased mortality. The estimate for the effect of PM10 on deaths from cardiorespiratory diseases was 0.62% (0.43% to 0.81%) per 10 µg/m3 compared with 0.26% (0.09% to 0.42%) for other cause mortality. Exposure to PM10 had a greater impact on females than on males. Adults aged 60 and over were more vulnerable to particulate air pollution at high levels than those aged less than 60. The PM10 effect varied across different cities and marginally decreased in cities with higher PM10 concentrations.
Conclusion: Particulate air pollution has a greater impact on deaths from cardiorespiratory diseases than it does on other cause mortality. People aged 60 or more have a higher risk of death from particulate air pollution than people aged less than 60. The estimates of the effect varied across cities and covered a wide range of domain.
In 2009 and 2010, China undertook a 4 trillion Yuan fiscal stimulus, roughly equivalent to 12 percent of annual GDP. The “fiscal” stimulus was largely financed by off-balance sheet companies (local financing vehicles) that borrowed and spent on behalf of local governments. The off-balance sheet financial institutions continued to grow after the stimulus program ended at the end of 2010. After the end of the stimulus program, spending by these off-balance sheet companies accounted for roughly 10% of GDP each year, with an increasing share used for what are essentially private commercial projects. The off-balance spending by local governments is likely responsible for a 5 percentage-point increase in the aggregate investment rate and part of the 7 to 8 percentage-point decline in current account surplus since 2008. Finally, we argue that local governments used their new access to financial resources to facilitate access to capital to favored private firms, which potentially worsens the overall efficiency of capital allocation. The long run effect of off-balance sheet spending by local governments may be a permanent decline in the growth rate of aggregate productivity and GDP.
Journal of Environmental Economics and Management, 2016, Vol. 79, pp. 18-39.
By exploiting exogenous variations in air quality during the 2008 Beijing Olympic Games, we estimate the effect of air pollution on mortality in China. We find that a 10 percent decrease in PM10 concentrations reduces the monthly standardized all-cause mortality rate by 8 percent. Men and women are equally susceptible to air pollution risks. The age groups for which the air pollution effects are greatest are children under 10 years old and the elderly.
Starting in the late 1990s, China undertook a dramatic transformation of the large number of firms under state control. Small state-owned firms were privatized or closed. Large state-owned firms were corporatized and merged into large industrial groups under the control of the Chinese state. The state also created many new and large firms. We use detailed firm-level data to show that from 1998 to 2007, (i) state-owned firms that were closed were smaller and had low labor and capital productivity; (ii) the labor productivity of state-owned firms converged to that of private firms; (iii) the capital productivity of state-owned firms remained significantly lower than that of private firms; and (iv) total factor productivity (TFP) growth of state-owned firms was faster than that of private firms. We find the reforms of the state sector were responsible for 20 percent of aggregate TFP growth from 1998 to 2007.
Proceedings of the National Academy of Sciences, 2013, 110(32): 12936-12941.
This paper’s findings suggest that an arbitrary Chinese policy that greatly increases total suspended particulates (TSPs) air pollution is causing the 500 million residents of Northern China to lose more than 2.5 billion life years of life expectancy. The quasi-experimental empirical approach is based on China’s Huai River policy, which provided free winter heating via the provision of coal for boilers in cities north of the Huai River but denied heat to the south. Using a regression discontinuity design based on distance from the Huai River, we find that ambient concentrations of TSPs are about 184 μg/m3 [95% confidence interval (CI): 61, 307] or 55% higher in the north. Further, the results indicate that life expectancies are about 5.5 y (95% CI: 0.8, 10.2) lower in the north owing to an increased incidence of cardiorespiratory mortality. More generally, the analysis suggests that long-term exposure to an additional 100 μg/m3 of TSPs is associated with a reduction in life expectancy at birth of about 3.0 y (95% CI: 0.4, 5.6).
China’s investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from China’s national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.
Interview With Lars Peter Hansen, Recipient Of Nobel Prize In Economics: Generally, The Advantages Of China‘s Economy Becoming More And More Open Outweigh The Disadvantages
Interview With Thomas Sargent, Recipient Of Nobel Prize In Economics: China Has Been A Leader In The Field Of Small And Micro Finance Applying Artificial Intelligence
Recipient Of Nobel Prize In Economics: China’s Fintech Innovation Is In The Front Ranks Of The World
Inaugural Conference Explores Challenges and Opportunities for Research on Macroeconomics and Finance in China
Xiao Gang: Securities Law Not Only Protects The Rights And Interests Of Individual Investors, But Also Prevents Excessive Litigation
China’s Economy Might Be Nearly a Seventh Smaller Than Reported
Nobel Prize Winner: Blockchain And The Real Economy Can Improve Social Production Efficiency
Registration-based IPO reform to play key role in high-quality development
China’s A-share market is finally going to see the first initial public offering of a firm with dual-class shares, a special equity structure used by overseas public tech firms, which received the regulatory nod last month.
The China Securities Regulatory Commission, the country’s top securities regulator, said on Dec 24 that it had agreed the IPO registration of UCloud Technology Co Ltd, a Shanghai-based cloud computing services provider, signaling that the company will debut soon.
Upon a fully subscribed IPO, UCloud’s three co-founders will retain 23 percent of the company’s total shares but 60 percent of the voting rights because of the dual-class share structure.
This first A-share IPO allowing dual-class shares resulted from the optimization of listing standards on the sci-tech innovation board, or STAR Market, which debuted on the Shanghai Stock Exchange in July.
Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the IPO registration of UCloud reflects the STAR Market’s inclusiveness to innovative enterprises, which is unprecedented in the history of the A-share market.
“The biggest innovation of China’s capital market in 2019 was the launch of the STAR Market with the registration-based IPO system. This marks the determinant battle of capital market reforms and has profound implications,” Dong said.
For many tech firms with strong management teams, the dual-class share structure is critical, as it will guarantee founders’ control over the company despite enormous equity financing, according to Dong.
Other groundbreaking listing standards friendly to tech firms have also taken effect. As of Jan 7, one red-chip firm, which is based on the mainland but was incorporated overseas, had passed reviews for STAR Market IPOs and are awaiting registration with the CSRC, according to market tracker Wind Info. One firm yet to make profits is expected to get listed next week.
President Xi Jinping announced in November 2018 that China would launch the STAR Market and pilot the registration-based system. The country’s top leadership said this is an important move for China to both support innovation in key technologies and push ahead reforms in fundamental institutions of the capital market.
As well as attracting tech firms, the STAR Market is performing a role spearheading registration-based reforms such as those relating to market-oriented share pricing, market data show.
The STAR Market has removed the unwritten price-to-earnings ratio ceiling of 23 for IPOs and strengthened information disclosure to ensure investors are well-informed to price the offerings. Listed companies were priced at about 60 times earnings per share on average in 2019, according to Wind Info.
Also, eased secondary-market trading limits, especially the removal of price fluctuation limits during the first five trading days, have shortened the time of initial speculative trading and helped stock prices to reflect the value of listed firms faster, analysts said.
An index compiled by GF Securities that tracks stock prices of STAR Market-listed companies hit the highest level on the 11th trading day of the new board. By contrast, it took nearly 25 days for the ChiNext, Shenzhen’s innovative enterprise-heavy board that debuted in 2009, to stop the initial stock price surge driven by investor enthusiasm.
Based on the experience of the STAR Market, the country is ramping up registration-based reform efforts on other A-share submarkets.
On Dec 28, the nation adopted the revised securities law and amended new share sales arrangements to set the basis of registration-based reform across the whole A-share market step-by-step, with the ChiNext to be the next test board for the registration-based system.
The registration-based reform led by the STAR Market will play a key role in China’s high-quality development, according to analysts.
Unlike the past 40 years when industrialization powered China’s growth, the new economy backed by technological innovation will be the main driver of future economic development, said Xiao Gang, a national political adviser and former chairman of the CSRC.
To fit such economic upgrading, China’s bank-dominated financing system will also undergo major changes. The capital markets, with multilayered systems that cater to enterprises in different stages, will play a more important role, according to Xiao.
“New risks come with new technologies, so we need a financing mode whereby the fund provider and the fund receiver will bear the risks and reap the returns together. This is what capital markets do,” Xiao said at a policy panel at Tsinghua University in December.
Implementation of the registration-based system, meanwhile, will help the country’s capital markets to enhance their ability to serve the new economy by driving systemic reforms, according to Xiao.
Without the registration-based system, it would be difficult to either enforce stricter delisting rules or reform how the securities regulator functions, let alone intensifying crackdown on legal breaches and strengthening investor protection, Xiao said at a separate forum recently.
Looking ahead, analysts expect the market scale of the STAR Market to rapidly grow to accommodate tech giants, better performing its function of sharpening the country’s technology innovation capacity.
Li Daxiao, chief economist with Yingda Securities, said this would entail both a faster pace of IPOs and listing of firms with larger market capitalization and business revenue, such as those comparable to Ant Financial and ByteDance.
A report from GF Securities said between 160 and 180 firms are expected to list on the STAR Market this year, up from 70 last year, adding that the market may welcome its official index “STAR 50” in the first quarter.
Moreover, the “the sci-tech Q board” in the pipeline has big potential to coordinate with the STAR Market to promote the development of high-tech companies, said Xue Yi, a professor of finance at the University of International Business and Economics.
The Shanghai Equity Exchange said in December that it will establish the sci-tech Q board, where Q represents quotation, to nurture more companies suitable for STAR IPOs.
Companies above a certain size and with the potential to file IPO applications on the STAR Market in the next few years will be qualified to list on the Q board, whereby they could disclose company information, offer stock quotes online, and transact equities offline, the exchange said.
The Q board could address the weak link of the STAR Market whereas it cannot serve the financing needs of small high-tech companies, Xue said. “Information disclosure before IPOs will help mitigate information asymmetries and attract more investors, reducing financing costs faced by small high-tech companies.”
If the Q board’s quotation system grants companies the right to choose investors, it can go a long way toward maintaining their innovative capacity, as they could choose investors that attach less importance to short-term financial performance but encourage long-term innovation activities, Xue said.
For the STAR Market to become a real success, several reforms should be pushed ahead, such as introducing more long-term institutional investors, and formulating policies to address concerns of red-chip companies considering listing on the new board, said a report from the Evergrande Research Institute.
“The STAR Market has just started a groundbreaking journey, and there is still a long way to go to fulfill its ambitious commitment,” it said.
Recently, at the Macroeconomy and Finance in China Conference held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management, National Business Daily interviewed Lars Peter Hansen, 2013 Nobel Prize recipient and David Rockefeller Distinguished Service Professor in Economics, University of Chicago.
Professor Hansen said that China’s economy is becoming more and more open, especially in the fields of capital markets, financial markets, and foreign investment. He feels that this is a very good policy and goal and hopes it can play out in these terms. Although China’s economy is enough to provide a buffer for some of the Chinese economy’s own turbulence, there will certainly be more uncertainties after Chinese market opening up. However, in general, the advantages outweigh the disadvantages.
Opening does not necessarily cause instability
In July this year, the Office of the Financial Stability Development Committee of the State Council of China launched 11 measures to open the financial industry on the basis of in-depth research and evaluation, including encouraging foreign financial institutions to participate in the establishment and investment of wealth management subsidiaries of commercial banks; relaxation of foreign insurance companies entry conditions, canceling the 30-year operating life requirement; allowing foreign institutions to obtain Class A lead underwriting licenses in the interbank bond market; further facilitating foreign institutional investors to invest in the interbank bond market.
However, there are also some concerns in the market: Will China’s greater financial openness threaten China’s financial security and stability? How can we find a balance between opening up, financial stability, and macro stability?
In this regard, Professor Hansen told the reporter from National Business Daily, “This is a very important and interesting issue. First, I want to state that I only understand some aspects of China’s reforms at a macro level, and I am not familiar with the specific details. But I do see that the Chinese economy is becoming more and more open now, especially in the fields of capital markets, financial markets, foreign investment, etc. I think this is a very good policy and goal, and I hope it can play out in these terms. ”
“Opening does not necessarily cause instability”, Professor Hansen believes, there are many reasons for this. For example, being more open to foreign investors may be able to better share market risks, and everyone can better resist and respond to insecurity. Certainty, companies can also get more financial support. From this perspective, these reforms can promote economic growth.
He said although China’s economy could provide more buffers for the turmoil, there will certainly be more external uncertainties entering the Chinese market after opening up. However, in general, the benefits outweigh the disadvantages, and he is pleased to see the Chinese government pursuing such reforms.
Additionally, Professor Hansen also mentioned at his age, it’s a wonderful miracle to come to China and meet individuals who are developing these technologies and applying them and see how smart they are in statistics, finance, and economics, and 45 years ago, there was none of that here.
A wise policy decision is to study uncertainty as much as possible
Professor Hansen is an important expert in dynamic economics. With the methods of macroeconomics, finance and statistics, he has been working at the forefront of economic thinking and modeling research. He has made many outstanding contributions in how economic entities respond to changing and risky environments. He has put a lot of effort into developing statistical methods that explore the interrelationship between macroeconomic indicators and financial market assets, and these methods have been widely used in empirical research in financial economics today.
Recently, his work has focused on uncertainty and its relationship to macroeconomic medium- and long-term risks, interpreting economic and financial data, and revealing the long-term importance of policy choices. Professor Hanson, Professor Sargent, and their collaborators have recently been studying methods for modeling economic decisions in an environment where uncertainty is difficult to quantify. They explore the importance of financial market models and characterize environments in which the beliefs of economic actors are fragile.
“From the perspective of a statistician, we mainly study how to interpret and sort out data,” Hansen told reporters. The world today is full of complexity and uncertainty. To try to solve these problems is very difficult. Even so, they still need to do economic analysis. Many people may simplify some situations when doing economic analysis, but he feels that it is important to explore these complexities.
He further pointed out that as statisticians and economists, they are trying to model individuals, groups, businesses. These economic entities will make various decisions. They must have a certain degree of forward-looking ability to be able to make smart decisions to deal with the complexity and uncertainty of the world. Economists also face the same problem when they are modeling, hoping to understand these market fluctuations and give a new interpretation.
Professor Hansen said, “The same is true for policy makers. When making policies, economists who can influence policies often pretend that they know all the answers, but in fact they do not know. So, a more sensible way to make policy decisions is to study these uncertainties as much as possible, and then give a reasonable explanation. How to overcome these uncertainties is what we focus on. I would like to quote from Mark Twain, education is the path from cocky ignorance to miserable uncertainty, and our academic research is to alleviate this pain for everyone. ”
Recently, at the Macroeconomy and Finance in China Conference held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management, National Business Daily interviewed Thomas Sargent, 2011 Nobel Prize recipient and professor of economics at New York University.
Professor Sargent mentioned China is at the forefront of the world in the field of fintech and has developed very rapidly. As an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it.
China plays a leading role in fintech
Over the past years, new finance including fintech, internet finance and blockchain have seen rapid growth, but also many challenges too. Regarding the supervision of the new finance industry, could you share your recommendations?
Professor Sargent answered that he saw some problems in blockchain, cryptocurrencies. For cryptocurrencies, there is lots of advertising and promise, which has gone ahead of what’s been realized. There are serious technical problems that involve the cost of running the system and many legal questions too.
About the application of artificial intelligence in the field of peer-to-peer lending and small and micro finance, Professor Sargent said, China’s really been a worldwide leader in applying artificial intelligence to internet funding and microfinance. It was very important in terms of lowering costs of doing transactions.
Professor Sargent also mentioned a colleague at MIT. “He believed that in many very poor societies, there will be huge benefits to getting very poor people access to loans which they didn’t have. For example, in very poor villages, who had ideas to start a business, but they couldn’t get the money. He and some other people were doing experiments to try and show how powerful it was. At a very low level, they didn’t have much money, but they showed they were very promising.”
“They set up systems in these villages where people could get a reputation for repaying even small loans. Because if they had a reputation for repaying, they could get the loans. If they couldn’t get the loans because they didn’t have the reputation. It’s like the chicken and the egg.
He also mentioned Ant Financial doing this. “It is with millions of people. Through artificial intelligence and machine learning build social credit system. China is the leader in this and it’s very exciting.”
Professor Sargent said, as an academic, he always aims to explore and understand things. And it’s very fascinating to observe an economy like China’s that’s seeing rapid changes in the overall financial landscape and seeing how it responds to it. It is useful. As economists, they always say, they always love markets in a way, but here we’re seeing experience with people learning, it’s also learning by doing when you create new markets, and it’s very revealing to have this type of evidence for a scholar like him to draw upon.
Encourage information sharing while protecting privacy
To Professor Sargent, China is indeed at the forefront of the world in the field of fintech and has developed very rapidly. However, he also pointed out that Fintech faces some challenges while developing.
He said, using artificial intelligence to figure out who is creditworthy, and the like, is important to support financial transactions but at some point, it also raises problems about privacy. This isn’t special to China, it’s a problem worldwide. How do we on the one hand encourage this type of information sharing that’s critical to financial transactions while at the same time figure out ways to protect privacy? This is a tremendously challenging problem going forward.
For example, Professor Sargent was in the US Army as an army officer. To become an officer, he needed to get security clearance from the army. So, they checked his bank accounts and loans to know his credit and financial status. The information they wanted to obtain from his bank account was private.
He also talked about a Chinese scholar, who is a cryptographer, who’s working on how to transmit some information but hide it. “But that’s something government regulators are going to get involved in in every country. And different people have different attitudes about where the line on this privacy is. Even my wife and I have different attitudes. An example would be – this is something that annoys her, but I like – you go to Amazon and order a book, and Amazon comes back and says, ‘we also think you’d like this book’, and they’re right. I find that great and my wife finds that creepy.”
In addition, Professor Sargent also shared his recent research topic and progress with us. He worked with Lars Peter Hansen, 2013 Nobel Prize recipient on developing methods for modeling economic decision-making in environments where uncertainty is hard to quantify and exploring the consequences for models with financial markets and characterized environments in which the beliefs of economic actors are fragile. He said they hoped to develop ways to incorporate this caution into economic models. To what extent we will be cautious depends on how much we care about it and how we want to do it.
As the second largest economy in the world, China has seen immense growth over the last 40 years, a result of more open markets and an innovative approach to advancing financial technologies. The Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management co-hosted a two-day academic conference to explore the interplay between finance and macroeconomics in China. The conference ignited an important conversation on the inner workings of the Chinese economy, the key players in economic policy and challenges for future research related to the Chinese financial market. During the conference, sessions dug deeper into the history of China’s financial markets, Chinese state-owned enterprise reform, and the productive role of finance in supporting economic growth in the future.
In his opening remarks, Lars Peter Hansen, Nobel Prize recipient, David Rockefeller Distinguished Service Professor in Economics, University of Chicago, stressed why this was an ideal time to host this conference in China, “Given the economic interconnections around the world and the increasing importance of China in the world economy, it incumbent for academic economists understand better first, what is unique about the Chinese economy and its challenges in future and second, what lessons can learned from the experiences of other economies on their paths towards economic advancement. By bringing together top scholars with knowledge and expertise about finance and the macroeconomy in China, we hope to nurture future research in this area.”
Chong-En Bai, Mansfield Freeman Chair Professor, Department of Economics; Dean, Tsinghua School of Economics and Management echoed this sentiment: “After launching the Tsinghua-Chicago University Joint Research Center for Economics and Finance in last September 2018, this conference is the first joint event organized by two institutions. The Joint Research Center aims to encourage the research on the Chinese economy and just sent out the call for proposals to people who is doing the study on the economy and research. This conference will feature several experts study findings and share the insights of economic development from different perspectives.”
Professor Hansen mentioned during the interview, as a scholar, he hopes to hear more from outside of the academic community and conduct multi-level and comprehensive exchanges with professionals from the government, private sector and other fields, so to better frame future research on the economy of China and to extract insights pertinent to economics more generally. “I should say at the outset, I only know about these reforms in the broadest of terms and I haven’t studied all the specific details of it. But the basic aim I understand, is to open up the financial markets in the Chinese economy, to foreign investors in the capital and financial markets, which I view as overall a good aim and a good policy, and I really hope that it can play out in these terms.”
“I don’t see this as necessarily destabilizing because in many respects. By allowing these foreign investors you might well be broadening the reach of risk-sharing possibilities of coping with uncertainty as well as bringing in new financial resources in the Chinese economy to help support new ventures.” So, Professor Hansen thought it can actually nurture growth and help to provide a buffer for some of the Chinese economy’s own turbulence but China does hold the door to some other source of uncertainty that comes from foreign markets. But overall, he thinks it’s very productive and is pleased to see the Chinese government pursuing such reforms.
Over the past years, new finance including fintech, internet finance and blockchain have seen rapid growth, but also many challenges too. Thomas Sargent, Nobel Prize recipient and professor of economics at New York University, expressed, China’s really been a worldwide leader in applying artificial intelligence to internet funding and microfinance. It is important in terms of lowering costs of doing transactions. China is indeed at the forefront of the world in the field of fintech and has developed very rapidly. “There will be huge benefits to getting very poor people access to loans which they didn’t have. For example, in very poor villages, people who had ideas to start a business, but they couldn’t get the money need to get money from others. It is important to set up things in these villages where people could get a reputation for repaying even small loans. Because if they had a reputation for repaying, they could get the loans.” Mr. Sargent mentioned. “Ant Financial is doing this. It is with millions of people. China is the leader in this.”
Artificial intelligence and machine learning could help to create this social credit system. But Professor Sargent reminded us to notice that using artificial intelligence to figure out who is creditworthy, and the like, is important to support financial transactions but at some point, it also raises problems about privacy. This isn’t special to China, it’s a problem worldwide. How do we on the one hand encourage this type of information sharing that’s critical to financial transactions while at the same time figure out ways to protect privacy? This is a tremendously challenging problem going forward.
Recently, the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management co-hosted the Macroeconomy and Finance in China Conference, an academic conference in Beijing. The challenges facing China’s sustainable economic development and the positive role of finance in supporting economic growth were discussed by participating experts.
They all agreed that as the second largest economy in the world, China has seen immense growth in economic and social development over the last 40 years, a result of more open markets and an innovative approach to advancing financial technologies.
Lars Peter Hansen, David Rockefeller Distinguished Service Professor in Economics, University of Chicago, said “Given the economic interconnections around the world and the increasing importance of China in the world economy, it incumbent for academic economists understand better, first, what is unique about the Chinese economy and its challenges in future and second, what lessons can learned from the experiences of other economies on their paths towards economic advancement. By bringing together top scholars with knowledge and expertise about finance and the macroeconomy in China, we hope to nurture future research in this area.”
In September 2018, the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management launched the Tsinghua-Chicago University Joint Research Center for Economics and Finance. Chong-En Bai, Mansfield Freeman Chair Professor, Department of Economics; Dean, Tsinghua School of Economics and Management mentioned that this center aimed to encourage the research on the Chinese economy, featured several experts study findings and shared the insights of economic development from different perspectives.
Professor Hansen said that he hoped to hear more from outside of the academic community and conduct multi-level and comprehensive exchanges with professionals from the government, private sector and other fields, so to better frame future research on the economy of China and to extract insights pertinent to economics more generally.
Mr. Xiao Gang, former chairman of the China Securities Regulatory Commission, said that Chinese regulatory authorities need to further clarify the boundary of supervision and avoid taking too many unnecessary responsibilities. The goal of regulation should focus on maintaining the openness, fairness and justice of the market. The role of the government is to formulate rules according to the law. It is necessary to severely punish illegal behaviours, as well as to protect the interests of investors in the market.
Mr. Xu Chenggang, professor of economics at Cheung Kong Graduate School of Business, mentioned that to achieve economic growth in China, it is essential to establish a business environment protecting fair competition.
Recently, Mr. Xiao Gang, former chairman of the China Securities Regulatory Commission, was interviewed on Securities Law by media including Sohu Finance at a conference organized by Tsinghua University and University of Chicago in Beijing. The Macroeconomy and Finance in China Conference was held by the Macro Finance Research Program at the University of Chicago’s Becker Friedman Institute for Economics and Tsinghua University School of Economics and Management.
Xiao Gang said that the derivatives market can play a role in hedging against risks and the economic downturn. Regardless of whether it is abroad or China, the period of economic downturn is often a time when the volume of derivative transactions increases rapidly. But most Chinese companies are not involved in derivatives trading.
Xiao Gang believes that to improve the authority and international influence of China’s derivatives market in the future, it is necessary to proceed from two aspects: one is to enrich the product types and tools of derivatives, and the other is to expand the opening-up of the derivatives market. We can have the discourse power and the ability of pricing only when the market is opened up and global investors are allowed to enter.
Xiao Gang also commented on the Securities Law. He said that its revision has made great progress based on the original draft, and made a relatively comprehensive revision from many aspects, such as investor protection and the reform of issuance system, etc.
Xiao Gang also said that China does not have a Class Action System at present. To protect the interests of investors, the Securities Law should incorporate a Class Action System. However, it is necessary to make regulations in line with China’s actual conditions on the scope of the Class Action cases, the qualifications of the litigants and the courts in charge of the cases, etc., to prevent the occurrence of excessive litigation.
The following are highlights of the interview:
Sohu Finance: How do you view the current regulatory model of China’s derivatives market?
Xiao Gang: There are some unique aspects of China’s regulatory model for derivatives that I think are effective.
First, the regulatory authorities have a very strict process for the development and launch of derivatives, with the purpose of serving the real economy, and every product has been rigorously and adequately demonstrated.
Since we believe that each product represents an industry, such as iron ore, rubber and so on, the launch of product futures is not decided by the CSRC but should be fully and repeatedly discussed with relevant industry enterprises and competent authorities.
Second, a complete market supervision system including a margin system has been established to control the risks of futures trading.
Third, China’s supervision is “penetrating supervision”. The supervisory authority can get every investor’s account information, which foreign countries cannot do. This is a unique and effective part of China’s supervision.
Sohu Finance: How to improve pricing ability and international influence in the derivatives market?
Xiao Gang: First, we must enrich our products and tools. Now there are 70 varieties of futures products, which should be further enriched. At the same time, options and swap tools should be appropriately added to hedge industrial investors and provide risk hedging services.
Second, it is a crucial step to expand the opening up of the derivatives market. We can have the discourse power and the ability of pricing only when the market is opened up and global investors are allowed to enter.
Sohu Finance: During the economic downturn, what role can the derivatives market play in resisting financial risks?
Xiao Gang: The derivatives market can play a better role in hedging the downside risks of the economy. According to the empirical analysis of countries around the world, whether in the United States, Japan, or China, the period of economic downturn is often a time when the volume of derivative transactions increases rapidly.
Because whether it is a business entity or a financial institution, it is necessary to hedge against future risks, including the risk of price fluctuations, capital costs, and so on.
For example, China is a big importer of iron ore. From January to November this year, China imported 970 million tons of iron ore, a slight decrease of 0.7% from last year, but the money spent on imports increased by 33%, which meant we are paying 33% more for the same thing.
Iron ore is mainly imported by iron and steel enterprises. During the same period, the profits of China’s iron and steel enterprises fell by 30%. Although this number is a coincidence, it shows that quite a few companies have not done risk management. Since only 8% of companies participate in derivatives transactions, which is far lower than developed countries such as the United States, this highlights the urgency and importance of the use of derivatives for hedging risks by business entities.
Journalist: Is it because the large state-owned enterprises don’t care?
Xiao Gang: Not exactly. There are historical reasons for this. In the past, state-owned enterprises had in deficit when they made derivatives. Therefore, we must summarize experience correctly, not to deny it, but use the derivatives market to hedge risks under the premise of standardized management.
We talk about the opening up of crude and iron ore futures and allowing foreign invest in the domestic crude futures market now. China’s crude futures price have become the third price except the United States and Europe. Companies that using oil will compare the prices of three places, thus the influence of this price will begin to appear.
I believe that after a few more years, the influence will be even greater. In addition, for foreign investors, the funds they invest in crude futures can be easily moved in and out at any time.
Journalist: How do you view China’s progress in opening up the capital account? Is the opening up of capital markets in the short-term still one of the first things economic policymakers would do?
Xiao Gang: China does not currently have a capital account open, but we can create a new model to allow foreign investors free access to China’s A-share market.
China has a long way to go to open its capital account, and we need to achieve it gradually. In this process, we can gradually open our financial trading account. For example, Shanghai-Hong Kong Stock Connect is part of it. In the future, we need to follow this new model to open financial trading accounts and capital accounts.
Journalist: How do you view the progress of the current amendment of the Securities Law? When do you think the Securities Law may take effect?
Xiao Gang: It depends on the legislature. Now that it is the third explanation, the Standing Committee of the National People’s Congress has recently conducted its fourth review in accordance with the procedures of the Legislative Council. We can focus on the published agenda later.
Journalist: From the national significance of the Securities Law amendment, how do you think its development in the capital market?
Xiao Gang: I think it is very useful. Because this amendment is a big step forward from the original law. It has absorbed opinions from various aspects and made a relatively comprehensive amendment such as investor protection and reform of the issuance system. To promote the healthy development of the market, improving the rule of law in the market will definitely have a good impact.
Journalist: Once the amended version of the Securities Law is officially passed, what can we expect to further improve the legal system that is closely related to the interests of investors? Will the securities class action system with Chinese characteristics be included?
Xiao Gang: I think the Class Action System should be included. This is an important weapon for investor protection. To implement this system smoothly, legislation should be made clear first, because China does not have a Class Action System.
Journalist: What are the specific characteristics of the Securities Class Action System with Chinese characteristics?
Xiao Gang: It is worth studying. It is characterized by the need to protect the rights and interests of individual investors, and to prevent excessive litigation. Therefore, it is necessary to make regulations in line with China’s actual conditions on the scope of the Class Action cases, the qualifications of the litigants and the courts in charge of the cases.
A new paper, by Chang-Tai Hsieh of the University of Chicago and three co-authors from the Chinese University of Hong Kong, finds that industrial output and investment have been consistently embellished. As a result, they argue that China overstated real GDP growth by two percentage points on average every year from 2008 to 2016 (see chart). Over time that adds up: official figures for 2016 would have exaggerated the size of the economy by 16%, or more than $1.5trn.
Last week, four China specialists published a paper arguing that China’s growth since 2008 has been about 1.7 percentage points lower annually than reported. In other words, the economic slowdown has been a lot steeper than Beijing reported. The economists—Chang-Tai Hsieh of the University of Chicago and Zheng Song, Wei Chen and Xilu Chen of Chinese University of Hong Kong—did two main tests of the official data.
This figure reports the number and the amount of defaulted bonds, both in absolute value (first chart) and in percentage relative to all corporate bonds (second chart). Before 2014, investors believed that bonds were implicitly guaranteed by government. The burst of defaults in 2016 was driven by the tightened liquidity and deepening financial deleveraging campaign of the government. Although the percentage of defaults reaches its highest peak (0.6%) in 2018, it is relatively low compared to the global counterpart which is 1.8% during 2008-2017 according to a recent report by Moody’s.
Source: Handbook on China’s Financial System: Chinese Bond Market and Interbank Market, by Marlene Amstad and Zhiguo He
This figure presents the time-varying composition of bond markets in China and U.S. by issuing entities: government, financial institutions and non-financial corporations. Non-government bonds has grown rapidly during the past ten years from 15% of the total market capitalization in 2008 to 42% in 2017. The China bond market, which reached 75 trillion RMB in 2017, has become an important channel to transfer household saving to the real sectors in the economy.
Source: Handbook on China’s Financial System: Chinese Bond Market and Interbank Market, by Marlene Amstad and Zhiguo He
This figure illustrates that China bond market has gone through tremendous development during the past ten years, which is an integral step of China financial reform. The first chart in figure one depicts the growing market capitalization scaled by GDP, from 38% in 2008 to 90% in 2017. The second chart shows that China bond market experiences a steady uprising trend relative to stock market, catching up the U.S. level which is about 130% in 2017.
Source: Handbook on China’s Financial System: Chinese Bond Market and Interbank Market, by Marlene Amstad and Zhiguo He