Dec 2019, Volume 14 Issue 4

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  • Orginal Article
    Qihong Liu, Jie Shuai

    We analyze product differentiation in a multi-dimensional model with non-uniform consumer distribution. The level of product differentiation is measured by both unit transport costs and firms’ locations. Our analysis concerns both measures. First, fixing firms’ locations, we show that equilibrium prices can increase or decrease with unit transport costs. The overall result depends on the interplay of a shifting effect and a rotating effect—the latter exists only in multi-dimensional models. Second, fixing unit transport costs, we find that under non-uniform distribution, there may exist no equilibrium where firms maximize differentiation on one dimension but minimize differentiation on other dimensions. Instead, there may exist an equilibrium where firms choose intermediate locations, contrary to common findings in existing studies which assume uniform distribution.

  • Orginal Article
    Michael Peng, Dongkai Jiang, Yingjie Wang

    This paper provides the first empirical study on bond defaults in the Chinese market. It overcomes the deficiencies of existing methods, which suffer from lack of actual default data for back testing. With newly available bond default data, we analyze the roles of market variables against accounting variables under various models. While we find that Merton’s market-based structural model and KMV’s Distance to Default exhibit languid discriminating power compared with hazard models that have carefully constructed predictors, other market variables carry significant information about bond defaults and could help improve on models with only the accounting variables. This implies that the collective intelligence of the market could somehow mitigate the distortion caused by misreported accounting information. Further, model performance can be significantly improved by adding predicting variables that link an individual financial measure to the broader market performance, such as the relative margin—a business environment proxy introduced in this study. We not only shed light on the default behavior of the Chinese bond market, but also provide a promising approach to improve the variable selection process.

  • Orginal Article
    Qing Shi, Chen Wang, Wei Wang

    Based on firm level data for the period of 1998–2007, this paper attempts to explain the growth differences between private enterprises and state-owned enterprises (SOEs) in China, in the context of liquidity shocks, and institutional and financial environments. It is found that (1) when liquidity tightens, the private enterprises face stricter credit constraints than SOEs, which restricts the development of private enterprise; (2) when liquidity becomes abundant, private enterprises face fewer financial limitations and grow much faster than SOEs; (3) the effect of liquidity shocks on the growth rate gap between private enterprises and SOEs has weakened during the period 2002–2007. These findings reveal that the credit discrimination against private enterprises can be mitigated by improving institutional and financial environments, which weaken the effects of liquidity shocks on firm growth.

  • Orginal Article
    Hiroya Akiba

    This paper theoretically considers the long-run sustainability of China’s monetary-cum-exchange rate policy under the impossible trinity. Two different models are examined: One sterilizes current net foreign assets (NFAs) and the other focuses on NFAs realized in the previous period. Under the de facto opening of financial flows, sterilization yields a negative risk premium in uncovered interest parity (UIP) that triggers a feedback increase among capital inflows. Here, stability depends on the magnitudes and the combination of structural and policy parameters. It is shown that if current capital inflows are sterilized, the monetary-cum-exchange rate policy in China offers a sustainable solution for exchange rates that are relatively stringently managed. However, such a solution can be obtained for relatively flexible or moderately managed rates if sterilization policy is implemented on the previous period’s inflows.

  • Orginal Article
    Lixue Wu, Cheng Liu

    Based on the features of China’s project investment, we consider the formation of production capacity as a matching behavior between local governments and investment enterprises. Using the search and matching model, we illustrate that the excess capacity in China mainly results from the asymmetry between the gains from and contribution to the project matching: The capacity will be excessive when the proportion of local governments’ return exceeds its contribution to the project, and the more unbalanced the return–contribution relationship, the more severe the overcapacity. Meanwhile, we test this theoretical prediction based on a quasi-natural experiment: the reform of administrative approval system. The empirical results show that the reduction of the local governments’ return–contribution ratio will significantly raise the capacity utilization rate and mitigate the overcapacity. Industry-specific regression results further indicate that governments’ return–contribution asymmetry is more prominent in industries dominated by state-owned enterprises, high-monopoly industries, heavy industries, and industries with serious overcapacity. This paper offers a novel mechanism of overcapacity, a theoretical criterion for judging optimal capacity, and some new regulatory tools with the micro foundation.