China Economic Quarterly

Vol.14        No.2

January， 2015

CONTENTS

Local Fiscal Burden and Public Good Provision: Impact of Rural Tax-for-Fee Reform
………………………………………………………………………Li-an Zhou    Yi Chen 417

Fiscal Decentralization and Economic Growth in China: A Meta-Regression Analysis
………………………………………………………………………Zhenfa Xie    Wei Zhang 435

Bounded Rationality, Heterogeneous Expectation and Endogenous Evolution Mechanism of Housing Price
……………………………………………Zhongfei Li    Jun Zheng    Yuyuan Huang 453

“FH puzzle”’s Applications for Inter-province and Proofs of the Theory
………………………………………………………………………………Dingxing Wang 483

Formal Financial Institutions Development, Multiplier Effect of Internal Fund and Assets Growth of Chinese Firms
……………………Xiaosheng Ju    Dic Lo    Chaofeng Huang    Ruilong Guan 507

Profit Efficiencies and Influences of the Chinese State-owned Commercial Banks: Based on Their Ownership Structure Changes  
…………………………………………Wen Yang    Bangzhu Sun    Xiangbin Cheng 535

China’s Environmental Pollution and Economic Growth
………………………………………………………………………Min Wang    Ying Huang 557

The Expansion of Graduate Education, Returns to Higher Education and Wage Inequality: Empirical Study of Taiwan
………………………………………………………………………Wenyi Chen    Lily Jiang 579

Dismantling Teaching Points: Integrate Education Resources or Reduce Investment in Education？Based on the Analysis of 1996—2009 Provincial Panel Data………………………………………………………………Dong Ding    Fengtian Zheng 603

Asymmetric Responses to Cost Shocks and Sticky Prices: Evidence from China’s Manufacturing Firms
………………………………………………………………………………………Yang Lu 623

Disparity between Urban and Rural Areas in China: A Business Cycle Perspective
……………………Weijin Zhang    Chen-ray Fang    Ching-hsiang Huang 651

Accumulation of International Reserves,Goods and Asset Price Inflation, and the Independence of Monetary Policy
………………………………………………………………………………………Junfeng Qiu 677

Research on the Effect of China’s Foreign Trade on Productivity, Earnings and Environment: Based on the Threshold Panel Model
…………………………………………Yanfang Lyu    Dong Wang    Shuwen Chen 703

Platform Competition between Cable TV Stations: From Free-to-air to PayTV
…………………………………………………………………Yuanzhu Lu    Xu Zhang 731

Employment “Polarization” in China: An Empirical Research
…………………………………………………………………Shibin Lyu    Shiwei Zhang 757

Railways and Domestic Market Development in the Late Qing Dynasty
……………………………………………………………………Se Yan    Meng Xu 779

A Stationarity Reconsideration of China’s Macroeconomic Time Series: Endogenous Breaks and Smooth Transitions
………………………………………………………………………………………Qing    Han 801

Local Fiscal Burden and Public Good Provision: Impact of Rural Tax-for-Fee Reform

LI-AN ZHOU*

（Peking University)

YI CHEN

（University of California，Los Angeles）

Abstract     Using the 1997—2005 county-level panel data, we estimate the effects of the rural tax reform on the county fiscal burden and the supply of local public services. We use Difference-in-Differences method to identify the causality. The reform cancelled the previously levied informal fees. Because part of the fees is transformed to agricultural taxes, this increases the tax income on balance sheet. However, the county government’s burden is unambiguously increased because fee is cancelled. We further confirm the reform results in a drop in the supply of public service in the long run.

JEL Classification     H30， H41， H71

Fiscal Decentralization and Economic Growth in China: A Meta-Regression Analysis

ZHENFA XIE*     WEI ZHANG

（Xiamen University）

Abstract     In order to scrutinize whether the results of the empirical literatures on “fiscal decentralization and economic growth in China” are affected by the characteristics of specific studies, this paper has selected some high-quality empirical studies for meta-analysis. The results show that some empirical results were correlated with some characteristics of different studies, especially that the result of “fiscal decentralization helping to promote economic growth in China” was significantly influenced by “region, K/L, revolve, budgetary”. By means of the funnel plot asymmetry analysis, it is discovered that there were some publication biases in the sample studies, which mainly concentrated on the issue of fiscal expenditure decentralization.

JEL Classification     H77， O12， P35

Bounded Rationality, Heterogeneous Expectation and Endogenous Evolution Mechanism of Housing Price

ZHONGFEI LI*     JUN ZHENG     YUYUAN  HUANG

（Sun Yat-sen University）

Abstract     In this paper, we develop the traditional cobweb model into bilateral heterogeneous expectation cobweb model to analyze the endogenous evolutionary mechanism of housing price, and examine the effect of market participants’ psychological expectations upon housing prices through numerical analysis. The results show that, the expectation of fundamentalists does not seem to affect the stability of housing price dynamic system, while the expectation of chartists and developers lead to price fluctuations, thereby affecting the stability of housing price dynamic system. The model also researches the influence of real estate development costs on the dynamic evolution of house price. Development costs not only have positive impact on the fundamental price, but also lead to price evolution bifurcation when the cost increases to a certain critical value.

JEL Classification     C62，G02，R31

“FH puzzle”’s Applications for Inter-province and Proofs of the Theory

DINGXING WANG*

 (Xiamen University)

Abstract      “FH” equation can be used to explain the capital mobility among countries or provinces. We estimate the “FH” equation among provinces and find that the coefficient is not significant. So we include that there exists high mobility among provinces. The mobility results from the intervening of local governments. And a central-local model is made to describe the phenomenon. On one hand, capital mobility is useful for a long time development. On the other hand, the central government pays more attention to the economic performance. All this leads to high mobility.

JEL Classification     C23，  E22，  O11

Formal Financial Institutions Development, Multiplier Effect of Internal Fund and Assets Growth of Chinese Firms

XIAOSHENG JU*     CHAOFENG HUANG

(National University of Defense Technology)

DIC LO

(Renmin University of China)

RUILONG GUAN

(China Construction Bank)

Abstract     This paper analyzes the impact of the reform of China’s formal financial institutions on the financing constraints that listed enterprises face and thus on their growth, using data of listed companies at industrial sectors from the year 1994 to 2011. It finds that different periods show different influences. During the initial period of 1994—2000, the financial scale enlarged, efficiency improvement and the relative structure of the whole financial sector had significant contributions to firms’ growth. However, things changed in 2001, due to the government’s strategy on big banks, and the structure of financial sector became more unbalanced. Only the scale of financial system, especially that of banks contributed to the growth of firms. This study shows that in the China’s model of financial development, the scale of financial wealth plays the most important role. To release the function of financial sector further, reform in the future should focus on the financial structure adjustments.

JEL Classification     D21，G31，H32

Profit Efficiencies and Influences of the Chinese State-owned Commercial Banks: Based on Their Ownership Structure Changes

WEN YANG*

（Shenzhen University）

BANGZHU SUN

（Peking University）

XIANGBIN CHENG

（University of Hertfordshire）

Abstract     By constructing a onestep Fourier stochastic profit frontier model, we estimate profit efficiencies and test their influencing factors to aim at the fundamental ownership structural reform of China’s banking institutions since 2003. The results show that the average profit efficiency of the state-owned commercial banks ranks the second in all types of the whole sample. The decisive influencing factors include external supervision from IPO, efficient mechanisms of credit allocation based on improvement of internal governance structure，monopoly power of the state-owned commercial banks, the lasting high growth of China’s economy and technique progress.

JEL Classification     C33, D61，G21

China’s Environmental Pollution and Economic Growth

MIN WANG

(Peking University)

YING HUANG*

(Renmin University of China)

Abstract     China has experienced more than three decades of rapid growth, but suffers from severe environmental degradation. This paper uses latest panel dataset covering 112 cities from 2003 to 2010 to test the relationship between growth and air pollution. Using traditional environmental Kuznets model, we find that all pollutants exhibit “U shaped” curve, which are radically different from the results found by previous studies. By controlling individual time trend, we show that growth does not have to deteriorate the environment. Finally, we also show that regression results could be completely opposite if we use different data source for the same pollutant.  

JEL Classification     O13, Q53, Q56

The Expansion of Graduate Education, Returns to Higher Education and Wage Inequality: Empirical Study of Taiwan

WENYI CHEN LILY JIANG*

(Tamkang University, Taiwan)

Abstract     The paper analyzes the distributive effect of the expansion of graduate education. We propose a model of twotype labor markets and use data from Manpower Utilization Survey to do empirical study. We find that the expansion of graduate education raises social returns to education for both types of labors. The overall inequality of wages of higher educational labors is mainly from withingroup inequalities. Within each group, the cohort effect on wage inequality is significant, and it decreases for the younger cohorts of educated graduates. This implies that the expansion of graduate education is socially beneficial from the perspective of distribution.

JEL Classification     I28, J31, O15

Dismantling Teaching Points: Integrate Education Resources or Reduce Investment in Education？Based on the Analysis of 1996—2009 Provincial Panel Data

DONG DING*FENGTIAN ZHENG

（Renmin University of China）

Abstract     The motive of dismantling teaching points is being questioned by many aspects. This article analyses the nationwide provincial panel data from 1996 to 2009 from the perspective of financial expenditure accounted for education. Based on the results of theoretical analysis and FE model、Driscoll and Kraay(1998) method and IV-GMM model empirical test, it indicated that, since education finance ratio decreased dramatically with the proceeding of dismantling teaching points, dismantling teaching points is implemented for local officials selfishness. This paper shows the policy implication that the government should take advantage of coordination strength by undertaking appropriate education finance centralization.

JEL Classification     I22, I28, H52

Asymmetric Responses to Cost Shocks and Sticky Prices: Evidence from China’s Manufacturing Firms

YANG LU*

 (Chinese Academy of Social Sciences)

Abstract     According to the state-dependent pricing theory, the asymmetric and heterogeneity responses to cost shocks and sticky prices were estimated. We found that the price stickiness was asymmetric in manufacturing firms and the downward stickiness was larger than upward stickiness. Furthermore, the sticky price was also affected by the firm’s heterogeneity. Non-neutrality of money is realistic when the price has stickiness. So adjusting the quantity of money can affect output in the short term. However, due to the asymmetric price stickiness and its impacts in macroeconomics, output could decrease more significantly when the central bank adopting tight monetary policy to curb inflation. To the contrary, price level could increase more significantly when central bank adopting expansionary monetary policy to increase macro output.

JEL Classification     D21， D23， C25

Disparity between Urban and Rural Areas in China: A Business Cycle Perspective

WEIJIN ZHANG*

（Xi-an Jiaotong University）

CHEN-RAY FANG CHING-HSIANG HUANG

（National Taipei University）

Abstract     We analyze what accounts for disparity between urban and rural areas in China from a business cycle perspective. A two-sector, urban versus rural, DSGE model is developed and estimated using 1996—2012 data. Our model replicates the data well. We thus examine cyclical movements of income and consumption for both sectors that are due to various shocks to China’s economy, and the extent caused by these shocks. We also investigate what have caused the widening disparity during 2002—2004 and the lessening disparity for years after 2011, respectively. Finally, the effects of stabilization policies on cyclical movements of disparity are found to be asymmetric.

JEL Classification     E32,  E60,  R23

Accumulation of International Reserves, Goods and Asset Price Inflation, and the Independence of Monetary Policy

JUNFENG QIU*

（Central University of Finance and Economics）

Abstract     We show that the accumulation of international reserves will lead to higher money supply and higher goods and asset prices, and will reduce the independence of monetary policy. Monetary policy tools can prevent inflation only in the shortterm but not in the longrun. Even when goods prices are under good control, if people expect that higher inflation will happen in the future, asset prices can rise rapidly. Our model shows that, in the“impossible trinity”, giving up free flows of capital does not necessarily mean that a country can have both a stable exchange rate and an independent monetary policy.

JEL Classification     E52，E58，F41

Research on the Effect of China’s Foreign Trade on Productivity, Earnings and Environment: Based on the Threshold Panel Model

YANFANG LYU*

 (Dongbei University of Finance & Economics)

DONG WANG     SHUWEN CHEN

(Dalian University of Technology)

Abstract     In this paper, we construct the single or dual threshold models based on the provincial panel data from 1992 to 2010 to test trade variables’ effects on productivity, earnings, environment and characteristics of threshold. The results show the threshold characteristics of the effect of export and import on different macro variables based on GDP per capita. Studies suggest that eastern regions should expand trade space to enhance the core competitiveness of industries and western regions introduce advanced technology and key equipments to promote local output efficiency; trade development should be synchronous with income growth; regulatory policies shall be supported to rectify and improve the deviation caused by trade policy.

JEL Classification     C23，B52，F19

Platform Competition between Cable TV Stations: From Free-to-air to Pay-TV

YUANZHU LU*

（Central University of Finance and Economics）

XU ZHANG

（University of California， San Diego）

Abstract     This paper presents a model of platform competition between two cable TV stations. TV stations, producers and viewers play a threestage game, in which the equilibrium advertising levels, subscription fees (under the pay-TV regime) and program quality levels are determined. This paper compares the advertising levels, program quality levels and social welfare levels between social optimum, the free-to-air regime and the pay-TV regime. We find that although under the pay-TV regime cable TV stations charge subscription fees, the equilibrium program quality under this regime may be lower than under the free-to-air TV regime and is always lower than the socially optimal level. When both the nuisance cost parameter and transport cost parameter are small enough or big enough, the pay-TV regime is better than the free-to-air TV regime in terms of the social welfare.

JEL Classification     D43， L13， M37

Employment “Polarization” in China: An Empirical Research

SHIBIN LYU*

（Northeastern University at Qinhuangdao）

SHIWEI ZHANG

（Jilin University）

Abstract     Through surveying the manufacturing panel data in China from 1998 to 2009, the study suggests that employment “polarization” has appeared，which is featured with the phenomenon that employment growth rate in high-technology industries and low-technology industries has increased more than that in medium-technology industries. Combined with other related studies，the study suggests that employment “polarization”is a global phenomenon. Further analysis shows that, not only wage and industry scale, but also outsourcing, R&D and high-technological capital equipment have played an important role in changing employment.

JEL Classification     E24， J23， J24

Railways and Domestic Market Development in the Late Qing Dynasty

SE YAN*

（Peking University）

MENG XU

（University of California, Los Angeles）

Abstract     The period between 1881 and 1911 witnessed the first boom of railway construction in China. Using a unique wheat price dataset, we regress price differences for prefecture-pairs on railway construction and find that railways caused a 3.8% drop of price dispersion in prefectures connected by railways. The results remain significant after we control the endogeneity problem. We also find that railways also promoted market integration of the prefectures close to railways. Furthermore, our results show that railways caused decline of the markets along traditional trade routes but promoted new transportation network that connected railways with traditional trade routes.

JEL Classification     N75, R11, O18

A Stationarity Reconsideration of China’s Macroeconomic Time Series: Endogenous Breaks and Smooth Transitions

Qing Han*

（Shandong University）

Abstract     The idea that a great majority of macroeconomic variables are unit root processes dominates voluminously in empirical research. This paper argues that such kind of recognition needs to be reversed when we take into account of the structural changes. Specifically, the paper utilizes Fourier approximation to approach macroeconomic series. It differs from former literature in tackling breaks in that it converts the estimation of the potential location and style of breaks into a selection of appropriate frequencies used in Fourier expansion, which improves the size and power in testing of a null.

JEL Classification     C12, C22, C52