Summary： Since the outbreak of the financial crisis, the relationship between finance and the real economy has become a topic of heated discussion both in China and abroad. Although it appears to be a straightforward topic at first glance, in-depth analysis reveals it is indeed a problem that is difficult to unravel. The first difficulty relates to its concept. After decades of financialization, the boundary between finance and the real economy has increasingly blurred, making it increasingly hard to distinguish finance from the real economy. The second difficulty relates to its nature. The real economy remains weak, investment returns continue to decline and economic risks continue to accumulate, which has caused financial institutions to hesitate when issuing loans and investors to refrain from investing in corporate bonds or equity products. The third difficulty relates to finance itself. The tendency of finance to be alienated from the real economy has been embedded in its own logic of development, especially since the crisis.
The topic of “finance serving the real economy” in itself suffers from theoretical deficiencies, but nevertheless can serve as the foundation of our discussion. The issue should be approached from the perspective of the basic function of finance. Despite the variety of financial tools and complexity of financial activities, the ultimate aim of finance is to facilitate resource allocation in the market economy. Therefore, the basic requirement of the so-called “finance serving the real economy” is to ensure that the Chinese financial system properly plays its role as the medium for resource allocation. The so-called provision of better financial services for the real economy requires the reduction of mobilization costs and the improvement of mediation and allocation efficiency.
This raises a question: after 35 years of continuous reform, what kinds of obstacles and deficiencies are still preventing the Chinese financial system from properly playing its aforementioned role? In essence, six aspects of the Chinese financial system demand attention. First, the modern Chinese financial system is already in its embryonic shape, but benchmark prices that facilitate efficient resource allocation, such as interest rates, yield curves and exchange rates, have not been completely liberalized. Second, China suffers not from a general shortage of funding, but a shortage of long-term financing and an insufficient supply of equity funding; in other words, the problems of maturity and equity mismatch persist. Third, many citizens and businesses have gained access to financial services of reasonable quality, but the financial system that provides services for the vulnerable groups remains to be established, and the financial tools that satisfy their needs are yet to be developed. Fourth, the Chinese financial industry has indeed undergone impressive developments, but a market-oriented financial risk management system is still largely absent, and we still heavily rely on government's implicit or even explicit guarantees to manage risks. Fifth, the capital and financial account remains controlled, and the renminbi is still inconvertible, which undoubtedly obstructs the establishment of an open economy system. Sixth, although the basic framework for financial regulation is in place, its effectiveness, specificity and soundness remain to be improved, and the burning issue of regulatory impediments remains to be resolved.
In my opinion, the six aspects are the “important areas and key aspects” of China's strategic goal of achieving “a more mature and complete financial system by 2020”.In the three to five years ahead, we must make crucial progress on each of these aspects to effectively manage the growing financial risks in China.
Key Words： Finance; Real Economy; Alienation; Financial Function; Resource Allocation

Summary： China has stepped to the front of the world economy with 30 years of rapid development. The long-term extensive growth model has not only been overdrafted on a lot of valuable resources and resulted in huge environmental cost, but has also placed huge pressure on sustainable economic development. Economic transformation is a real and pressing issue faced by China, whose processes should account for both economic and environmental interests, coordinate current and long-term interests and promote the harmonious development of mankind and nature. How to transform and in which directions are major theoretical and practical questions that must be answered urgently. However, some Western countries, known collectively as the “Green Guard”, have put forward the so-called “China ecological environment threat” theory. Some of these Western countries also claim that China is incapable of addressing the relationship between economic development and ecological environment, and put forward the so-called “collapse of China” theory. In addition, a new liberal ideology has penetrated into our socialist ideology. All of this has had a great impact on the confidence in China's economic development. The Fifth Plenary Session of the 18th CPC Central Committee brought the important concept of green development forward. Green development is a highly condensed form of the regular understanding of the relationship between humans and nature, and is a major theoretical innovation in the human exploration of sustainable development. It is not only a powerful response to those who doubt China, but also a clear answer to questions about the direction and methods of China's economic transformation.
Green development inherits and innovates upon Marx's green development concept. This paper uses the development of environmental protection theories in the West and East as its background; sorts out the main viewpoints of the formation, development and deepening stages of Marx's green development concept; and points out that Marx's green development view is actually an inheritance and development of Eastern and Western ecological environment theory. It is an outlook that is opposed to the capitalist development concept and provides the scientific basis for the green transformation of the world. The green development concept is the outcome of Marxist localization in China. It is the right decision for facing the current developmental challenges in China, and a new extension of the national governance concept that enriches the theoretical system of socialism with Chinese characteristics. The innovative ideas are mainly: (1) emphasis on consciousness: building national consensus through an ecological civilization; (2) emphasis on system propulsion: implementing the strategy by top-level design; (3) emphasis on total control: promoting structural upgrading by deepening reform; (4) emphasis on technical support: building momentum by innovative drive; and (5) emphasis on open and cooperation: safeguarding ecological security by global action. Green development is a long-term and arduous task. We can break through China's green development ceiling by establishing its status in the country's economic development, accelerating the factor of commitment protection, strengthening institutional and legal constraints, driving resource optimization configuration and using a global vision basis to demonstrate China's role in the development of global environmental protection and green transformation.
This paper grasps the innovative kernel of green development and discusses the theoretical innovation of Marx's green development concept. It then constructs a theory of China's green development combined with its environmental protection situation and reveals related key issues. This not only counters the international doubts about China's green development, but also strengthens China's confidence in promoting economic development and environmental protection.
Key Words： Marxist; Green Development Concept; Mankind and Nature; Harmonious Coexistence

Summary： Distinct from the traditional view, which argues that a developed financial system would be beneficial for risk diversification and would promote economic growth, post-crisis studies have shifted their focus to the potential nonlinear relationship between finance and real economy as well as their complicated endogenous transmission mechanisms. In particular, as high leverage before a crisis and a rapid deleveraging process after a crisis usually lead to a cyclical “boom-bust” phenomenon, the relationship between financial leverage and economic growth has become an important topic in the study of post-crisis macroeconomics.
In the post-crisis research, although economists have extensively discussed the relationship between financial leverage and economic growth, many questions remain unanswered. First, regarding the question about whether financial leverage and economic growth are significantly correlated with each other and what types of relationship (linear or nonlinear) are involved in this correlation, the current studies are generally set in the early stages and have not yet reached a consensus. In addition, until now, most of the current studies have considered only the impact of level changes in financial leverage on the real economy, while the potential impact of financial leverage volatility on the real economy has been largely ignored. From a theoretical perspective, the smooth functioning of the macro economy depends on a stable and proper ratio of investment to finance, where excessive volatility of financial leverage undoubtedly undermines the stability of the investment-to-finance ratio and thus has negative effects on economic growth.
Considering the arguments and unresolved issues in the literature, this paper uses panel data on 68 countries over the period of 1981—2012 and investigates the relationships between financial leverage, leverage volatility and economic growth using system generalized methods of moments estimation. The empirical results show that there is a robust inverted U-shaped relationship between financial leverage and economic growth, suggesting there is a “turning point” after which the positive relationship between financial leverage and economic growth becomes negative. In addition, the empirical results show that the volatility of financial leverage has a significantly negative impact on economic growth, implying that an increase in financial leverage volatility leads to lower economic growth. The preceding two basic conclusions are found to be valid across various robustness checks. As for the location of the turning point for financial leverage, we find it is roughly located at around 1.486 for private sector credit/gross domestic product (GDP) and 2.269 for M2/GDP.
According to the empirical results of the paper, based on the average growth rate of private sector credit/GDP and M2/GDP in the most recent 10 years, China is anticipated to enter the turning point region around 2019—2020. After that, the Chinese economy may enter a “post-turning point” period and face the two basic problems of maintaining economic growth and reducing the financial leverage ratio. According to international experience, in the “post-turning point” period, China's economic growth rate may fall to 4—6%. However, as long as there is no major financial or economic crisis, China's total GDP is likely to reach its largest point during the period of 2028—2041. This means that in the near future the first principle of China's economic and financial development strategy should be “seeking high growth while maintaining stability” to avoid the hard landing of the economy due to economic and financial crises. In this context, from the empirical conclusions of the paper, we propose two policy suggestions. First, considering that China may soon enter the turning point region of financial leverage, after which the economy would face the pressure of slowing down, policy reactions should aim at seeking new growth areas with structural adjustment and economic transformation. Second, as the volatility of financial leverage itself is also detrimental to economic growth, to avoid drastic shock caused by excessive financial leverage volatility to the macro economy, even in the process of deleveraging, policy should fully consider smoothness of operation in practice to better balance economic growth and financial stability.
Key Words： Financial Leverage; Leverage Volatility; Economic Growth

Summary： Recent data show that the Chinese GDP growth rate declined continually from 10.6% in 2010 to 7.3% in 2014. Thus, determining the source of the decline, how to stop the decline and the stable interval of the growth rate are important, realistic, theoretical issues. Based on the reality of the “new normal” of the Chinese economy, we would like to provide empirical evidence on these issues.
This paper specifies a macroeconomic cointegrated system that consists of gross domestic product (GDP), consumption, investment and net export; transforms the reduced vector error correction model (VECM) of the cointegrated system into a structural VECM (SVECM); and then transforms the SVECM into a structural MA (SMA), which includes information about cointegration. Finally, we identify the long-and short-run impacts of shocks and decompose Chinese GDP into the long-term trend and transitory components. The theory of identification and decomposition via the SVECM is the common trend theory for a cointegrated system (Stock & Watson, 1988; King et al., 1991). It demonstrates that if the cointegrated system has n cointegrated I(1) variables with cointegration rank r, then the cointegrated system has n-r common trends. King et al. (1991) prove that the n-r common trends originate from n-r permanent shocks, and that the remaining r shocks are transitory shocks. Permanent shocks such as technical progress and institutional change in economic growth have permanent effects on GDP. Transitory shocks such as changes in nominal money and expectation have transitory effects on the GDP growth rate. Following the definition of Blanchard & Fisher (1989), the permanent shocks form the long-term trend, whereas the transitory shocks form the transitory components. Applying the preceding economic and econometric theory, this study decomposes Chinese GDP into the long-term trend and transitory components.
We also study the evolution of the long-term trend and transitory components, make inferences about the stable interval of the GDP growth rate based on this evolution and demonstrate the quantitative characteristics of China's economic “new normal”. The main conclusions are stated as follows. First, the long-term trend of Chinese GDP is shifting downward; its average growth rate declined from 9.88% in 2001—2009 to 7.85% in 2010—2014. In 2014, the growth rate of the GDP trend was only 7.6%. The transitory component has also moved downward since 2013, declining by 0.55 percentage points in 2014. Thus, the decline in the long-term trend and transitory components are the sources of the continual decline in Chinese GDP growth rate. It is time that China's economy opened a period of “new normal”.
Second, the decline in the long-term trend is consistent with the changes in the long-term growth factors and relevant theories. China's economy is suffering from “structural deceleration”, the restriction of energy conservation and emission reductions, the decline in physical and human capital growth rates and the decrease in demographic dividends, which are long-term growth factors in supply-side economic theory. So, the decline in the long-term trend is consistent with the changes in the long-term growth factors, which imply a certain degree of weak supply in the Chinese economy and can be regarded partly as evidence for the supply-side reform.
Third, by studying the evolution of the long-term trend and transitory components, this paper makes an inference and concludes that the GDP growth rate will be stable within the range of 6%—7.5% with a probability of 91.5%, and that the growth rate of the long-term trend is between 5.5% and 7.5%. These results demonstrate the quantitative characteristics of the “new normal”.
Fourth, the policy implication of the quantitative characteristics of the “new normal” is that the macro-management under the “new normal” should focus on promoting the growth of the long-term growth factors via supply-side reform.
Key Words： Long-term Trend; Economic Slowdown; Cointegration; New Normal

Summary： This paper shows that the retail sales of consumer goods (RSCG) and fixed-asset investment (FAI) usually used in the estimation of Chinese dynamic stochastic general equilibrium (DSGE) models contain misleading information, and suggests replacing them with annual household consumption and fixed capital formation in gross domestic product (GDP) using the expenditure approach.
Due to a lack of quarterly data, the usual practice in the estimation of Chinese DSGE models is aggregating monthly RSCG and FAI data to obtain quarterly data on consumption and investment. However, there are important differences between these series and the corresponding model variables by definition. The inconsistency between model variables and observed data may lead to incorrect results in parameter estimation. Chang et al(2016) interpolate annual household consumption expenditure and fixed capital formation in expenditure GDP using RSCG and FAI as interpolaters to obtain usable quarterly data. However, the seasonal information of the interpolated series retained from RSCG and FAI may be misleading.
This paper instead proposes the usage of mixed-frequency data in a DSGE model estimation, that is, replacing the quarterly data of RSCG and FAI with the annual data of household consumption expenditure and fixed capital formation, and combining annual data with quarterly data. The solution to the DSGE model can be cast in state-space form and estimated via the Kalman filter. The low frequency series are considered high frequency series with missing observations. Thus, the Kalman filter implemented in Dynare can deal with missing values easily. Apart from consumption and investment, the time series used for the model estimation include GDP, GDP deflator and money aggregates (M2).
Based on the Bayesian technique, this paper estimates a DSGE model using mixed-and single-frequency (quarterly) data, respectively. Comparing the estimation results, there are significant discrepancies between the mixed-and single-frequency estimates. In particular, compared with single-frequency estimates, the investment adjustment costs parameter of the mixed-frequency estimates is larger, while the standard deviation of permanent technology shocks is lower, indicating a smaller role for permanent technology shocks in driving business cycles.
To assess the relative performance of alternative datasets, this paper considers the out-of-sample forecasting performance of the DSGE model. The predicted variables include GDP and inflation. The model is re-estimated every quarter and forecast forward for eight periods. The RMSE indicators are calculated from the predictive value and actual data. Based on the RMSE for GDP, the model estimated with mixed-frequency data outperforms that of quarterly data. For inflation, the model estimated with mixed-frequency data performs better in the long term but worse in the short term.
This paper estimates the CEE/SW model using data sampled at different frequencies. The variance decomposition shows that the main factors explaining China's output volatility are investment shocks, followed by monetary shocks, persistent technology shocks and external demand shocks. These four factors can explain more than 80% of the volatility of GDP, while the investment shocks alone can account for more than 30% of GDP variability. The contribution of investment shocks comes mainly from investment-specific technology shocks, measured by the relative price of investment.
This result differs from that of Justiniano et al. (2010, 2011), who find that shocks to marginal investment efficiency are the key drivers of business cycle fluctuations in U.S. output. However, like their analysis, the theoretical analysis presented here shows that investment shocks may be interpreted as a proxy for the overall health of the financial system.
Key Words： DSGE Model; Bayesian Method; Mixed-frequency Data; Investment Shocks

Summary： Over the past decades, the global financial system has become more integrated than ever, and finance has gradually replaced trade as one of the most important channels of risk contagion across countries. A clear understanding of the impact of global capital flow on its recipient countries thus has great significance to both policymakers and market regulators. Despite this, there remains a lack of rigorous empirical studies of how global capital flow impacts recipient countries, especially emerging markets. The literature uses time-series analysis (VAR) of aggregated variables to study the influences of short-term global capital flow (SGCF) on recipient countries. However, VAR analysis may not provide much insight into the channel of how SGCF affects these countries, as it not only overlooks the cross-sectional differences but also suffers from the identification problem.
We use a panel data approach to investigate the impact of SGCF on Chinese firms' cost of debt. A panel regression not only takes care of the cross-sectional difference of firms, but also controls for fixed effects. This advantage allows us to identify the heterogeneous impact of SGCF across firms. The uniqueness of the Chinese market makes it particularly suitable for such panel data analysis. China is one of the few countries in the world to adopt a managed floating exchange rate system and impose strict control on cross-border capital flows. This causes a significant amount of SGCF to sneak into China's bank deposits through faked international trade by artificially inflating export prices and deflating import prices, which implies that custom cities with higher volumes of foreign trade are easier destinations of SGCF. In addition, the markets of bank loans are regionally segmented across different cities, and SGCF is expected to have a heterogeneous influence on the cost of debt of firms in different cities. Therefore, we hypothesize that the cost of debt of firms in these cities should be more sensitive to SGCF than those with lower volumes of foreign trade; this SGCF impact on cost of debt is consistent with changes in local bank deposits. To test these hypotheses, we consider the single term of SGCF and its interaction with the city's previous-period foreign trade volume. We find that SGCF has a significant and heterogeneous impact on firms' cost of debt. Consistent with our hypotheses, firms headquartered in cities with higher volumes of foreign trade are affected more by SGCF. In comparison, the general influences of SGCF based on aggregated VAR analysis are insignificant.
The relation between cost of debt and SGCF may be reversed; that is, local credit conditions may shift the direction and increase the magnitude of SGCF. We deal with this issue by using the lag-period inflation rate of the United States as the instrument variable (IV) of SGCF. The empirical result of the IV analysis reveals that the endogeneity issue is not a concern for the crucial relation between SGCF and foreign trade volume. To further explore the channels of how SGCF affects the cost of debt of firms in different cities, and to verify our hypothesis that SGCF has a heterogeneous influence on the bank deposits of various cities, we run a regression analysis of bank deposits with SGCF and its interaction with local trade volume serving as the explanation variables. Our results show that those cities with larger trade volumes indeed see more bank deposit increases through capital flow. Furthermore, we study whether the impact of SGCF on the cost of debt can vary across industries. We find that the cost of debt of the manufacturing industry is more sensitive to SGCF than that of other industries. Further analyses show that this is because firms in the manufacturing industry rely more on bank loans as their funding resources than firms in other industries. Finally, we divide the sample into subsamples based on three periods and try other control variables to ensure the robustness of our results. We also carefully compare the empirical findings of this paper with the theoretical studies of SGCF and the sterilization operations of the People's Bank of China.
Key Words： Emerging Markets; Short-term Global Capital Flow; Cost of Debt; International Trade

Summary： Cash dividend unsmoothing is a prominent phenomenon in the Chinese capital market, but so far little empirical evidence has shown that investors have a preference for smooth dividends and are willing to pay a premium to hold shares in China. In this paper, we address this gap by asking whether investors like unsmoothing dividends. In particular, we examine two related questions. First, we ask which types of investors have “driven out” stocks that pay unsmoothing dividends. Second, we explore whether any such investor preference has implications for firms' cost of equity capital.
The first question helps us to understand the implications of dividend unsmoothing for the composition of a firm's equity holders. We find that institutional investors, especially non-independent investors (securities firms, insurance companies, social security funds, enterprise annuities, trust companies and financial companies), are significantly more likely to sell dividend unsmoothing stocks, while retail investors are less likely to do so. This relation was more pronounced before the completion of the Split Share Structure Reform. Our findings provide evidence that the Split Share Structure Reform was helpful in improving the independence of non-independent institutions investors in the capital markets. These findings are consistent with recent research by Larkin et al. (2016) suggesting that institutional investors are particularly effective monitors. They are also consistent with the findings of Leary & Michaely (2011) that firms that smooth dividends more often are those that appear to be most exposed to agency conflicts.
Our evidence suggests that dividend unsmoothing “drives out” institutions, but institutional investors do not seem to influence the smoothness of firms' dividends. To explore the causal effect of dividend unsmoothing on institutional investor composition, we use propensity score matching methods to alleviate the concerns. We find a set of counterfactual control groups to reduce the problem of endogeneity that may lead to a selection bias or a confounding bias in the sample. We examine the consistency of two stock groups and show the net effect of dividend unsmoothing on investor holdings. Our results support the observation that dividend unsmoothing influences institutions' investor holdings.
The second question centers on whether the preference for smoothing dividends on independent institutional investors has implications for firms' cost of equity capital. First, we examine the cumulative abnormal returns around the announcements of a dividend. We find that investors prefer cash dividend unsmoothing stock portfolios to market portfolios containing “miser” and “no rules” stocks, but that the level of cash dividend unsmoothing does not significantly affect investors' short-term wealth. Furthermore, investors holding stock portfolios with low rather than high levels of dividend unsmoothing must pay an additional 4.2% dividend smoothing premium. In addition, we find that cash dividend unsmoothing has a significant influence on investors' expected returns. Perhaps surprisingly, Larkin et al. (2016) find no discernable relation between a firm's dividend smoothing policy and its valuation or cost of equity capital. Yet, our findings suggest that a dividend smoothing premium exists in the Chinese capital market.
To summarize, we find that institutional investors, especially independent investors, display a preference for dividend smoothing stocks. We consistently find evidence that firms can reduce their cost of equity capital by smoothing their dividend streams. In this case, firms that do not value the institutional investor clientele pay an unsmoothing dividend to “drive them out”, but this may increase their cost of capital. Our findings also show that the Split Share Structure Reform in China was helpful in improving the independence of participants in the capital markets. These findings also provide an important reference for the construction of capital market systems in developing countries.
Key Words： Dividend Unsmoothing; Institutional Investor; Stock Portfolio; Split Share Structure Reform; Dividend Smoothing Premium

Summary： China's exports have been growing rapidly during the last decades.However, room for further export growth is shrinking due to costlier labor, the development of manufacturing in other developing countries like Vietnam and India, the appreciation of the renminbi and intensified trade frictions. As such, how to transform and upgrade export structure are urgent problems faced by China. However, with the upgrading of the quality of export products, quality information asymmetry will become a more important problem.
In international trade, due to spatial distance and differences in language, systems, cultures and other factors, the information asymmetry on product quality has become more severe. When it is difficult to fully identify the quality of an individual firm, buyers may consult the reputation of the group to which that firm belongs as a source of information. Regions and industries are often used as natural criteria for dividing groups, which makes regional and national reputation for product quality potentially important for exporting. Unfortunately, “made in China” is currently a sign of low quality. Thus, improving country or regional reputation is a pressing problem that must be solved for China. This paper shows that a regional reputation for quality has an important impact on the performance of firm exports in China; thus, it provides indirect evidence of the importance of country reputation for export performance.
On the issue of a “national quality reputation”, Cage & Rouzet (2015) stress that a country's “low quality” label puts it into a “low-quality trap”. Chisik (2003) shows that national quality reputation is a source of comparative advantage. However, the impact of regional reputation of export quality has mainly been investigated by theorists, and little empirical study has been conducted. The main contribution of this paper is to make up for this gap in the research.
Based on Chinese export enterprise data, we use the average export quality of neighboring firms in the same region of the same product as a proxy for regional quality reputation and link it with the export performance of enterprises. We find that higher regional quality reputation leads to higher exports of firms in that region. This finding is robust to controlling for trade costs, regional supply shocks, demand shocks in destination countries and other potential endogeneity problems. This positive impact comes from a rather intuitive mechanism: in the presence of asymmetric information that makes buyers unable to fully identify the product quality of individual exporters, the belief in the average quality of the exporter (which is affected by regional reputation) should affect the buyer's purchasing behavior (Akerlof, 1970).
The current paper empirically verifies this implication from several angles. First, regional reputation has a greater impact on domestic firms, as the quality information asymmetry of domestic firms is higher than that of foreign enterprises. Second, firms whose product quality is higher have greater capacity and motivation to signal the quality of their products and are less dependent on regional quality reputation. Third, the impact of regional quality reputation is greater for firms that export to more distant countries because they may face higher levels of information asymmetry. Fourth, firms that export through trade intermediaries are more affected by regional quality reputation than firms that export directly. We also find that regional quality reputation has a positive impact on product price. This evidence is consistent with the hypothesis that regional quality reputation is helpful for firms to overcome quality information asymmetry and improve export performance.
The results of this study indicate that with the upgrading of export product quality, local Chinese governments must pay more attention to the cultivation of “regional quality reputation”,which is a regional public good. Similarly, the Central Government of China must help to cultivate a “national quality reputation” to improve the reputation of “made in China” and to avoid falling into the “low-quality trap”.
Key Words： Information Asymmetry; Quality; Regional Quality Reputation; Export

Summary： The past 30 years have witnessed sustained rapid economic growth in China. However, with urbanization lagging behind industrialization, the labor income share has continued to decline in an even more pronounced way since the 1990s. More surprisingly, media often report that big companies such as Haier, Sany Heavy Industries, Foxconn and Huawei are laying off employees with the expansion of output. In the wake of the financial crisis and European debt crisis, it is natural to blame this on reduced external demand. However, further investigation reveals that the decline in employment demand for Chinese enterprises started well before the crises. Chinese industrial enterprise database data show that the average employment of enterprises has continued to decline at least since 1998, and more significantly in large companies, while the average business size has continued to expand. This is a puzzle that has nothing to do with the financial crises, as labor demand decreases with firm size.
According to the related research on employment and wages, most of the attention has largely focused on labor income share, ignoring the facts of a sustained downward labor demand at the firm level, especially for large firms. We find that the rapid development of semiconductor technology lowered the price of information equipment, causing the wide application of information technology and equipment in production at the end of the last century. This informatization process brings about a profound change in the mode of production and results in changes in labor demand. To be specific, we develop a theoretical framework based on firm heterogeneity in information technology, and examine the impact of information and communication technology (ICT) on labor demand and labor income share. The results show that firms' information technology investment reduces their labor income share, but does not necessary cut down their quantity of labor demand, which hinges critically on the degree of competition. Furthermore, we prove that the adoption of ICT worsens firms' demand for labor if the degree of competition is sufficiently low. Otherwise, if the degree of competition is strong, then the adoption of ICT increases firms' demand for labor. We empirically examine these arguments using a large sample dataset and find strong evidence in support of the theoretical hypothesis. This result has profound implications for “ensuring economic growth and employment” and promoting the integration of information technology applications with industrialization.
Compared with the current research, this paper makes the following main contribution. First, it is the first study to put forward and examine the issue of declining employment in enterprises from the perspective of informationization. Second, it develops a theory and unbundles the impact of information technology on enterprise employment demand into two effects: the “substitution effect” and “scale effect”. Third, it deepens our understanding of the declining labor income share in China from the perspective of informationization. Fourth, instead of using aggregate data, this paper improves on the current research on labor income share by examining the issue based on a firm-level dataset. Fifth, this paper is the first to document the simultaneous reduction in labor income share and labor demand and examine two issues together in the same framework. It also shows that the impacts of ICT on labor demand and labor income share are different, as the latter is affected by not only labor demand but also wages.
This paper makes three main suggestions. First, promoting employment has a crucial role in breaking the monopoly of industry, which may prevent a significant reduction in employment in the process of informationization. Second, it suggests that the labor income share decrease caused by enterprise resource allocation inequality may be partly offset by breaking the barriers of elements flow, which should promote income distribution more reasonably. Finally, it suggests that increasing labor force education and training expenditures may increase employment and improve income distribution.
Key Words： Information Technology; Labor Income Share; Declining Labor Demands

Summary： China has accomplished great achievements in economic development， but the economic growth model that heavily relies on extensive investment in fixed assets cannot be sustainable. The central government repeatedly stresses the importance of transforming the economy from an extensive to an intensive form， but its practical efforts seem unsatisfactory. Why is it so difficult to change the economic growth model in China? This paper attempts to explain the formation mechanism of an extensive growth pattern from the perspective of Chinese-style decentralization.
The paper assumes that local officials， as rational economic individuals， are faced with two kinds of investment choice： production investment and innovation investment. The former is characterized by short-term cycles， quick effects and low risk. The latter， in contrast， is characterized by long-term cycles， slow effects and high risk. To maximize economic and political interests， during their time in office， local officials have incentives to pay more attention to production investment than to innovation investment. For simplicity， this paper terms this incentive the local official's self-interested investment preference.
Chinese-style decentralization involves decentralized regional economies under centralized political governance. Under the system of centralized political governance， local officials are mainly supervised by the central authorities. As central overseers have limited information about a local official's behaviors and local governments have multiple responsibilities that are difficult to quantify， the central authorities cannot effectively restrain the self-interested investment preference of local officials. In the context of regionally economic decentralization， local governments and officials control huge amounts of fiscal and economic resources， make relatively independent economic decisions and have a variety of administrative powers to intervene in resource allocation in the market. Consequently， a local official's self-interested investment preference can affect investment behaviors of various kinds of market participants through the local government's “visible hand” and government-dominated economy， resulting in the inclination of local governments， enterprises and even the whole society to invest more in production than in innovation. According to the preceding analysis， we propose that Chinese-style decentralization is the cause of the distortion of the investment structure and the extensive economic growth pattern.
This paper confirms the hypothesis using China's province-level panel data. Empirically， as the degree of political concentration is similar in all regions， Chinese-style decentralization is mainly reflected in the degree of regional economic decentralization， which (according to the relevant literature) is often approximated by fiscal decentralization. Thus， the theoretically distorted investment structure caused by Chinese-style decentralization can be used as a means of testing the impact of fiscal decentralization on investment propensity of different kinds of investors. The results show that fiscal decentralization does indeed have statistically significant and negative effects on the innovation-production investment ratios of local governments， enterprises and wider society. The results are robust to different econometric specifications.
Based on the conclusions， we offer two policy suggestions. First， horizontal supervision for local officials should be strengthened. An effective measure is to increase the role of the media and the public in supervising local officials， which should largely restrain local officials' self-interested investment preference and opportunistic behaviors. Second， the administrative power of government intervention in the economy should be restricted. Letting the market play a decisive role in the allocation of resources is an essential condition for China's economic transformation.
Key Words： Chinese Style Decentralization; Self-interested Investment Preference; Innovation Investment; Production Investment; Extensive Economic Growth

Summary： China will experience a sharp labor force shortage in the next decade. According to the China Household Finance Survey, the cumulative reduction in the labor force in 2014-2018 will be about 26 million people with an average annual reduction of 5.2 million people. The adjustment of the Chinese population fertility policy from the one-child policy in 1980 to the two-children policy in 2014 is a long-term and fundamental measure adopted to increase the labor force supply, but in the short term it is very helpful for studying how to activate the current labor force stock by increasing the participation rate of married women in the labor force.
This paper studies the labor force participation rate of married women in China from the perspective of the exogenous adjustment of the county minimum wage standards. Theoretically, for a representative worker, the rise in minimum wage should increase his/her wage but reduce his/her probability of being employed, and the overall effect on expected income depends on the relative size of the two effects of minimum wage. Using micro data from the China Household Financial Surveys conducted in 2011 and 2013 as well as the minimum wage standards of each county collected by hand between 2011 and 2013,we investigate the effect of the minimum wage increases on the labor force participation rate of married women.
Regression results show that an increase of 10% in the minimum wage standard should significantly increase an employee's wage by 6% and decrease his/her probability of being employed by 1.2 percentage points. Overall, the main regression results show that an increase of 10% in the minimum wage standard may result in a significant increase in the labor force participation rate among married women by 1.86 percentage points after some external factors, such as individual characteristics, household characteristics, the macroeconomic characteristics of the surveyed counties and districts, time trends and the fixed effects of the surveyed counties and districts, are controlled. A regression analysis of the minimum wage with a probit model or a fixed-effect model and a modified definition of labor participation or the standardized average wage of the surveyed counties and districts shows that the results remain robust. If an increase of 10% in the minimum wage occurs, then the labor force participation rate among married women increases significantly by 1.6-2.9 percentage points. The increase in the labor force participation rate of married women due to minimum wage increases is mainly reflected in the low-income group of workers. As the minimum wage rises by 10%, the labor force participation rate of married women with the lowest 25% wage should increase by 3.03 percentage points. In contrast, every 10% increase in the minimum wage should lead to a mere1.43 percentage point increase in the labor force participation rate of married women with wages between 50% and 75%.
The influence on the labor force participation of married women aged 35-44 is most significant. Their labor force participation rates should significantly increase by 3.55 percentage points with every 10% increase in the minimum wage. The labor force participation rate of married women with less than 9 years of education should increase by 1.88 percentage points with a 10% increase in the minimum wage. Also, the labor participation rate of married women from western regions should increase by 6.39 percentage points with a 10% increase in the minimum wage. Compared with married women from non-agricultural households, married women from agricultural households should increase their labor participation rate more considerably as the minimum wage rate rises.
The conclusions of this study have significant policy implications. According to the China Household Financial Survey, there are about 355 million married women aged 16-60 in the country. If the minimum wage were to rise by 10%, the female labor force participation rate would increase by 1.86 percentage points, with a 6.6-million-person increase in the labor force. The increase in the minimum wage standard could substantially alleviate the labor shortage in China.
Key Words： Minimum Wage; Married Women; Labor Force Participation

Summary： The new proactive fiscal policies in China have gained increasing attention from academics, who have mainly focused on whether local government has borrowed too much to sustain a high growth rate, whether the increasing fiscal leverage will induce a fiscal crisis and how to deal with it if so. Our empirical observations indicate that the explicit leverage rate of local governments has not broken the warning line but is very close to it. The regional distribution of debt solvency risk is severely unbalanced, and Western provinces with a low GDP per capita have higher fiscal leverage rates. This paper tries to capture how the traditional debt financing pattern has reduced the effort of local governments to engage in internal risk control and induced a group of irresponsible financing preferences. It also tries to identify the rules that the central government should follow to adjust local fiscal leverage and maintain a balance between risk control and growth promotion.
From the perspective of soft budgetary constraints, the literature finds that both emerging and high-income economies have two kinds of incentive to shirk responsibility, namely, the cross-regional incentive arising from “common pool” effect of bailout expectation and the inter-temporal incentive arising from the election competition game of different parties. These two incentives build an inverse U-shaped curve of growth performance for local government leverage. There are three theoretical explanations. The first is “crowding-out effect” of government borrowing. The second emphasizes the dispute between individual rationality and collective rationality. The third uses agency theory to prove that local officials may have an agency opportunism motivation and that their main purpose for debt financing is a self-interest preference rather than public need. However, more empirical evidence is needed to prove whether these theories can explain such facts in China.
This paper uses the spatial econometric model and non-linear dynamic threshold method to evaluate the incentives and growth performance of local fiscal leverage from spatial and temporal perspectives. The empirical results indicate that provinces in the irresponsible group have a significant regional contagion effect. The reason is that the traditional cadre evaluation system focusing on growth performance instead of risk control intensifies the irresponsible financing competition in such a group. In the sensitive year of cadre promotion, party secretaries significantly strengthened irresponsible debt financing to highlight performance and increase the probability of promotion. In three types of intergovernmental transfer, the discretionary transfer dominated bailout expectations and irresponsible motivation, and the other two types of transfer reduced its effect. Furthermore, although local government debt financing implies irresponsible motivations, the dynamic growth performance threshold we estimate is at least 10 percentage points higher than the current risk warning line in China.
Our study has four main findings. First, the traditional debt financing pattern of Chinese local governments creates a double incentive to shirk responsibility. Second, vertical imbalanced fiscal decentralization increasingly loosens explicit financing limitations and implicit credit contracts between local governments and financial institutions, providing the institutional background for local governments' shirking of responsibility. Third, less developed Western provinces show a stronger short-sign propensity for shirking responsibility. Fourth, local governments' irresponsible financing causes growth performance to have a non-linear threshold effect. The growth performance of fiscal leverage above the threshold value declines rapidly, but does not obviously impede growth. The explicit threshold value is still higher than the Chinese official risk warning line, which leaves policy space for the government to increase the mid-and long-term risk warning line. These results provide strategic choices for the adjustment of local fiscal leverage under the “new normal” economic situation.
Key Words： Incentive to Shirk Responsibility; Soft Budget Constraint; Growth Performance Threshold; Local Fiscal Leverage

Summary： The administrative restriction of land supply and circulation and the strict management of urban household registration have restricted the market allocation of population and land elements in China's urbanization process. With the rapid growth of the urban economy and the large amount of labor migration, the land system and household registration system must be reformed to adapt to the accelerating urbanifzation process. Based on this background, this paper attempts to establish a theoretical model to study the mechanism and effect of land transfer and household registration system reform on China's urbanization.
In the literature, special land and household registration systems are considered to be the main causes of urbanization in China (Lu and Wan, 2014; Wen and Xiong, 2014). Research has examined the relationships between household registration systems, land systems, urban immigrant welfare, household registration, land and urbanization. In general, this research has been limited to comparisons of international experience, case analysis, typical fact summaries and general logical reasoning. There remains no unified theoretical framework based on microcosmic individuals analyzing the linkage between land systems, household registration systems and urbanization.
This paper attempts to make up for the lack of research in the urban economic literature, and to construct a theoretical model of endogenous urbanization including two types of heterogeneous individuals in rural and urban areas. This model is based on the Lewis dualistic economic model, based on which we relax our hypotheses about the infinite supply of rural surplus labor and labor homogeneity, taking into account the mutual game mechanism of the political economy interest groups and Lucas's human capital externality following immigration human capital accumulation in the city. The model introduces the restriction of land transfer and population migration, and describes the impact of the land and household registration systems on urbanization and resident welfare.
Theoretical equilibrium results show the following. First, under strict land control and household registration restrictions, only rural individuals with higher human capital move to cities. Second, allowing for land transfer displacement or relaxing urban household registration has two effects. On the one hand, it moves more labor from rural to urban areas due to increasing land revenue and reduced mobility costs, thereby speeding up the urbanization. On the other hand, it increases individual (both in urban and rural areas) output and significantly improves individual welfare in rural areas, resulting in a slight decline in urban individual welfare. Furthermore, calibration parameters and simulation tests support theoretical conclusions, and counter factual experiments using related urbanization and land data from 2000 to 2012 reveal that allowing a unit “homestead” to replace 0.5 units of city construction land increased urbanization by 1 percentage point over the actual value in 2000 and 2.5 percentage points over the value in 2011. If the overall degree of labor friction had fallen by 0.3 unit, the urbanization rate would have increased by 2 percentage points in 2000 and 3 percentage points in 2011.
This paper has the following main policy implications. It suggests breaking the dual labor market in China, integrating the labor market, further deepening the Chongqing “land” system and building a unified national indicator market to achieve the land use rights associated with trans-regional allocation.
Key Words： Land Transfer; Relaxation of Household Registration System; Labor Heterogeneity; Urbanization; Regional Equilibrium