Housing, Household Debt, and the Business Cycle: An Application to China and Korea
China and South Korea both experienced substantial increases in household debt through 2021, and now both countries face a weakening economy. This essay gleans lessons from the “credit-driven household demand channel” (e.g., Mian and Sufi 2018) to explore how the two economies will fare in the years ahead. On the positive side, neither country is at risk of a severe financial crisis, and both countries have a strong current account position. On the negative side, consumer spending in both countries could be quite weak in the years ahead. For China, the biggest risk is that distortions in the production sector aimed at boosting the property market were a major driver of growth during the boom, and it is unclear how growth can continue to be sustained with the property market stumbling.
Homemade Foreign Trading
Using cross-border holding data from all custodians in China’s Stock Connect, we provide evidence that Chinese mainland insiders tend to evade the see-through surveillance by round-tripping via the Stock Connect program. After the regulatory reform of Northbound Investor Identification in 2018, the correlation between insider trading and northbound flows decays, and so does the return predictability of northbound flows. The reduction of return predictability is especially pronounced among less prestigious foreign custodians and cross-operating mainland custodians, behind which mainland insiders are more likely to hide. Our analysis sheds light on the role of regulatory cooperation over capital market integration.
The Stock Connect to China
Among all the accesses to Chinese capital market, the Connect program (including both stocks and bonds) represents the most recent “opening-up” effort from Beijing and quickly became the dominant investment channel for foreign investors. On April 10, 2014, the China Securities Regulatory Commission (CSRC, the regulator on the mainland side) and the Securities and Futures Commission (SFC, the regulator on the Hong Kong side) approved the development of a pilot program for establishing mutual market access between the mainland exchanges and Hong Kong Stock Exchange (HKEX). Accordingly, the “Shanghai-Hong Kong Stock Connect” and “Shenzhen- Hong Kong Stock Connect” were officially launched on November 17, 2014 and December 5, 2016, respectively.
By analyzing how cross-border flows respond to macro-related shocks, we show that compared with possibly homemade foreign investors, genuine foreign investors are more likely affected by the U.S. monetary shocks, the exchange rate risk, the U.S. market performance as well as the cross-market valuation disparity. The paper highlights the importance of profiling different groups of cross-border participants over market integration.
International Spillover Effects of Air Pollution: Evidence from Mortality and Health Data
We study the international spillover effects of air pollution by developing a framework that integrates recent advances in atmospheric science with econometric estimation and microdata on mortality and health. Combining transboundary particle trajectory data with the universe of individual-level mortality and emergency room visit data in South Korea, we find that transboundary air pollution from China significantly increases mortality and morbidity in South Korea. Using our estimates, we quantify that a recent Chinese environmental regulation “war on pollution” had a substantial international spillover benefit. Finally, we examine China’s strategic pollution reductions and provide its implications for the potential Coasian bargaining.
Subjective Performance Evaluation, Influence Activities, and Bureaucratic Work Behavior: Evidence from China
Subjective performance evaluation is widely used by firms and governments to provide work incentives. However, delegating evaluation power to local leadership could induce influence activities: employees might devote too much effort to impressing/pleasing their evaluator, relative to working toward the goals of the organization itself. We conduct a large-scale randomized field experiment among Chinese local civil servants to study the existence and implications of influence activities. We find that civil servants do engage in evaluator-specific influence to affect evaluation outcomes, partly in the form of reallocating work efforts toward job tasks that are more important and observable to the evaluator. Importantly, we show that introducing uncertainty about the evaluator’s identity discourages evaluator-specific influence activities and improves bureaucratic work performance.
Local Government Financial Constraint and Spending Multiplier in China
I estimate the local government spending multiplier to be 14 at the prefecture city level in China during 2001-2019. To overcome identification challenges, I construct a novel instrument for local government spending using the fraction of unoccupied raw land in the downtown area in 2000. After the land market was formalized in 2000, a higher fraction of unoccupied raw land implies higher net profits from land sales for local governments. The fraction is uncorrelated with either the level or the growth of economic activities and infrastructure before 2000, or net land supply after 2000. The multiplier is larger for cities with higher GDP per capita and GDP growth rate before 2000, and does not depend on the benefit from WTO entry or the initial level of infrastructure. There are large positive spillovers within but not across cities. The large spending multiplier can be explained by the facts that local government spending has been productive. The increase of local government spending increases labor demand and wages, firm entry and local firms’ productivity and output, especially for industries with more use of transportation services. It also generates positive spillovers through technology and supply chains.
When Information Conflicts with Obligations: the Role of Motivated Cognition
We experimentally test how psychological motivations can impact the processing of purely objective information. We first document that, when the high-stakes College Entrance Exam is held in the month of Ramadan, Chinese Muslim students perform significantly worse. When asked about the impact of fasting, they severely underestimate the cost of taking the exam during Ramadan, even when presented with direct empirical evidence. In the experiment, we randomly offer students reading materials in which well-respected Muslim clerics explain that it is permissible to postpone the fast until after the exam. Consistent with an interpretation of motivated cognition, students who receive the material distort the statistics about the fasting cost significantly less, and become more accepting of delaying the fast for the exam.
Does the Squeaky Wheel Get More Grease? The Direct and Indirect Effects of Citizen Participation on Environmental Governance in China
We conducted a nationwide field experiment in China to evaluate the direct and indirect impacts of assigning firms to public or private citizen appeals treatments when they violate pollution standards. There are three main findings. First, public appeals to the regulator through social media substantially reduce violations and pollution emissions, while private appeals cause more modest environmental improvements. Second, experimentally adding “likes” and “shares” to social media appeals increases regulatory effort, suggesting visibility as an important mechanism. Third, treatment pollution reductions are not offset by control firm increases, based on randomly varying the proportion of treatment firms at the prefecture-level.
Industrial Land Discount in China: A Public Finance Perspective
China’s land market features a substantial industrial discount: industrial-zoned land is an order of magnitude cheaper than residential land. In contrast to explanations centered on subsidies to industry or promoting industry growth, we emphasize the importance of future tax revenues from the land and find that local public finance incentives can largely rationalize this price gap. Under the “land finance” system, land sales are an important source of revenues for Chinese local governments. We show that local governments, who serve as monopolistic land sellers in China, face a trade-off between supplying residential or industrial land that is determined by the different time profiles of revenues from industrial and residential land sales, local governments’ financial constraints, and the extent of local governments’ tax revenue sharing with other levels of government.
Judicial Independence, Local Protectionism, and Economic Integration: Evidence from China
We show that judicial independence can reduce local protectionism and foster crossregional economic integration. We exploit a judicial independence reform in China with staggered roll-out since 2014. The reform removed local governments’ control over local courts’ financial and personnel decisions, thereby substantially improving local courts’ independence. Combining novel data on the universes of civil lawsuits and business registration records, we show that local defendants’ rate of winning court cases against non-local plaintiffs declined by 7.0% after the reform. The effect is mainly driven by improvements in the quality of judicial decisions and is more salient for politically connected local defendants. Over time, the reduction in local protectionism encouraged smaller non-local firms to file lawsuits against larger local firms. Using the shareholding network extracted from business registration records, we find that the decline in local protectionism could attract 8.4% more inward investment flows into reformed localities. This has the potential to increase China’s GDP by 2.3% when the judicial independence reform is implemented nationwide.