Fang, Wu, Zhang, and Zhou advance a novel hypothesis that President Xi's anti-corruption campaign from late 2012 may have contributed to the recent resurgence of the state-owned enterprises (SOEs) in China as an unintended consequence. They explore the nexus between the anti-corruption campaign and the SOE resurgence by presenting supporting evidence from the Chinese real estate sector which is notorious for pervasive rent-seeking and corruption. Fang, Wu, Zhang, and Zhou use a unique dataset of land parcel transactions merged with firm-level registration information and a difference-in-difference empirical design to show that, relative to the industrial land parcels which serve as the control, the fraction of residential land parcels purchased by SOEs increased significantly relative to that purchased by private developers after the anti-corruption campaign. This finding is robust to a set of alternative specifications. Fang, Wu, Zhang, and Zhou interpret the findings through the lens of a model where the researchers show, since selling land to private developers carries the stereotype that the city official may have received bribes, even the "clean" local officials will become more willing to award land to SOEs though there are more efficient competing private developers. Fang, Wu, Zhang, and Zhou find evidence consistent with the model predictions.
Cai, McLean, Zhang, and Zhao study the interaction of short sellers and social media and the effect on stock prices. The researchers use 75.1 million investment-related social media posts for 3,683 unique Chinese firms. Prior to high short interest, social media tone is abnormally positive. Once highly shorted, the tone flips and is abnormally negative. No such pattern exists with traditional media. Compared to firms that are just highly shorted, highly shorted firms with pump-and-dump patterns in social media tone have abnormal returns that are 2.7x higher before, and 3x lower after, the initiation of high short interest. Evidence from natural experiments involving China's introduction and subsequent suspension of shorting also suggest social media manipulation. Manipulation is more likely in firms located in provinces with weaker legal environments. Their findings show that in the realm of social media, short sellers may profit more by creating mispricing than by correcting it.
Alder, Song, and Zhu estimate the returns to infrastructure investments for each city-to-city link in China's road network. Using real-time GPS data from over half a million trucks, they first identify congested and uncongested links based on whether speed significantly decreases with traffic density. Alder, Song, and Zhu then estimate the elasticity of traffic flows to the capacity of a link conditional on its congestion status. The researchers incorporate congestion heterogeneity into a trade model with optimal route choices developed by Allen and Arkolakis (2019). Their structural estimation shows that the model can replicate the main features of traffic flow, speed and congestion in the data. The benefit of expanding the capacity of a link is inferred from the estimated model. The cost of the expansion is estimated from construction costs based on physical topography and market value of acquired land. Alder, Song, and Zhu find that about 80% of China's intercity links are uncongested and associated with negative returns. The returns are much higher for congested links and the dispersion is generally large. While they focus on marginal local improvements in individual link capacity and do not quantify aggregate misallocation of the entire network, the large dispersion in returns across links suggests there could be misallocation of road infrastructure investment in China. To facilitate comparison, Alder, Song, and Zhu also analyze real-time traffic flow data for highways in England. In sharp contrast to China, almost all intercity links in England are found to be congested.
An artificially low interest rate on household savings is a common form of financial repression in developing economies and typically benefits incumbent banks. Using proprietary data from a leading Chinese FinTech company, Buchak, Hu, and Wei study the role of Fintech in ending the financial repression by introducing to households money market funds (MMFs) with deposit-like features. Cities and banks whose depositor base are more exposed to FinTech see greater deposit outflows. Importantly, banks respond to FinTech competition by offering their own products with market interest rates. FinTech thus facilitates a bottom-up interest rate liberalization.
This paper was distributed as Working Paper 29448, where an updated version may be available.
In recent decades, Chinese researchers have become preeminent contributors to the scientific enterprise, as reflected by the citation impact of publications originating from Chinese research institutions. But are there frictions specific to the diffusion of scientific knowledge originating from China? Focusing on elite chemistry researchers, Qiu, Steinwender, and Azoulay assemble a sample of articles by Chinese and non-Chinese PIs, carefully matched on “quality.” They find that relative to non-Chinese, non-US PIs, Chinese PIs’ articles receive 32% fewer citations from US researchers on average. This discount vanishes for the articles of scientists who received the entirety of their training in the US, and is twice as large in subfields afflicted by a large number of retraction scandals. Their results imply that US researchers do not build as readily on the work of Chinese researchers, relative to the work of other foreign scientists, even in a setting where Chinese scientists have long excelled.
Existing research attributes investor return heterogeneity to individual characteristics such as sophistication. Gao, Hu, Peng, Kelly, and Zhu bring a new perspective from the supply side by showing that return heterogeneity can be magnified as assets offered by the market become more complex. Using account-level transaction data of retail investors, the researchers examine the trading of B funds--complex, structured products in the Chinese market. During a three-year window covering a full market cycle, the return gap between the naive and sophisticated is an order-of-magnitude greater when trading B funds than when trading simple, non-structured funds. In an event study, Gao, Hu, Peng, Kelly, and Zhu further confirm that the disparity is driven by differences in investors' understanding of product complexity: when a market crash triggers B funds into a restructuring process with significant loss of market value, naive investors respond less rationally than sophisticated investors.
Many governments have engaged in policy experimentation in various forms to resolve uncertainty and facilitate learning. However, little is understood about the characteristics of policy experimentation, and how the structure of experimentation may affect policy learning and policy outcomes. In this project, Wang and Yang aim to describe and understand China's policy experimentation since the 1980s, among the largest and most systematic in recent history. They collect comprehensive data on policy experimentation conducted in China over the past 4 decades by 98 ministries and commissions. Wang and Yang find three main results. First, more than 80% of the experiments exhibit positive sample selection in terms of locality's economic development, and much of the positive selection can be attributed to misaligned incentives between the central and local government. Second, local politicians exert greater effort and allocate more local resources to ensure the success of experiments, and such effort is not replicable when policies roll out to the entire country. Third, the presence of sample selection and strategic effort is not fully accounted for by the central government, thus affecting policy learning and distorting national policies originating from the experimentation. Taken together, these results suggest that while bureaucratic and institutional factors make China's policy experimentation at such scale possible, the complex political environment can limit the scope and bias the direction of policy learning.
This paper was distributed as Working Paper 29402, where an updated version may be available.
Han, Jiang, and Mei develop measures for technology decoupling and dependence between the U.S. and China based on combined patent data. The first two decades of the century witnessed a steady increase in technology integration (or less decoupling), but China's dependence on the U.S. increased (decreased) during the first (second) decade. Decoupling in a technology field predicts China's growing dependence on U.S. technology, which, in turn, predicts less decoupling further down the road. Decoupling is associated with more patent outputs in China, but lower firm productivity and valuation. China's innovation-oriented industrial policies trade off the inherent conflict between indigenous innovation and firm competitiveness.
Chen, Xiao, and Zha study how interbank wholesale funding in China influences monetary policy transmission under a dual-track interest-rate system and how it contributes to increasing systemic risks in recent years. By constructing a bank-panel dataset, the researchers find that wholesale funding via interbank certificates of deposit not only facilitates policy interest rates to transmit into loan by non-state banks, but also leads to fast growth in their shadow banking activities as an unintended consequence. Accordingly, non-state banks with a heavier exposure to wholesale funding witness a larger increase in systemic risks in response to negative shocks to the economy since 2018. Chen, Xiao, and Zha advance a theoretical explanation of their empirical findings and quantify the trade-off of banking regulation on wholesale funding between the effectiveness of monetary policy transmission and exposure to systemic risks within this framework.