Summary： The debt ratio of Chinese enterprises has risen dramatically since the “fourtrillion stimulus plan”. To reduce the financial risk brought about by this high leverage, the economic affairs committee of the central government has made deleveraging a high priority. The goal is to lower firms' leverage and force “zombie firms” to exit the market. However, some lowefficiency and insolvent firms have survived deleveraging and received financial support from banks while some very competitive and promising firms (mainly privately owned) have had their loans suspended by banks, seriously undermining the real economy and leading to a decline in nongovernmental investment.
Our study provides an interpretation of the recent structural deleveraging in China using the theoretical framework of bank debt rollover. Leverage here refers to the amount of loans that an enterprise has borrowed from a bank and deleveraging refers to the bank's behavior in withdrawing these loans or refusing to provide refinancing for the enterprise when the loans expire. We use a theoretical model to compare two strategies of the bank, debt rollover and deleveraging. The bank can choose to rollover an expired loan by providing a new loan for the enterprise (refinancing) in which case the enterprise's leverage ratio remains unchanged or rises. Alternatively, the bank can choose deleveraging by withdrawing the loan's principal and interest and refusing to refinance the enterprise. In this case, the enterprise's leverage ratio declines and the enterprise can go bankrupt if it is insolvent after repaying the loan. We investigate how economic uncertainty influences banks' decisions between debt rollover and deleveraging.
Our findings suggest that economic uncertainty distorts a bank's incentive to rollover debt in such a way that the bank maintains some “bad” loans while eliminating some “good” ones. For zombie firms, uncertainty can encourage the bank to rollover the debt. For normal firms, economic uncertainty causes the bank to terminate loans and the firms to fall into the dilemma of capital shortage. When there is economic uncertainty, a bank can suffer a loss from a firm's failure but it does not share the firm's extra profits if the firm's investment turns out to be a success as the bank's payoff is capped above by the principle plus the interest. So for the bank, risk is not proportionally compensated.
Our paper contributes to the literature in three ways. First, previous studies attribute structural deleveraging to firms' ownership or to the implicit guarantee given by the government. We prove that banks can still choose to maintain “bad” loans and reduce “good” ones without considering the ownership of the firm or the implicit guarantee. Structural deleveraging can reflect market inefficiencies caused by economic uncertainty and the characteristics of debt financing.
Second, our paper provides a new explanation for the survival of zombie firms. In the literature, the main opinion on zombie firms is that they are due to the intervention of the government to prevent largescale unemployment resulting from the bankruptcy of zombie firms or to a bank's intention to hide bad loans (Caballero et al., 2008; Bruche and Llobet, 2014). To our knowledge, this is the first paper to suggest that economic uncertainty and banks' distorted rollover incentives contribute to the survival of zombie firms.
Lastly, our research sheds light on deleveraging policy. The purpose of deleveraging is to keep the “good” loans and reduce the “bad” ones. According to our model, excessive economic uncertainty and the government's implicit guarantee for zombie firms distorts banks' debt rollover incentives, which results in the wrong loans being kept. To achieve the policy goals of deleveraging, the government should endeavor to reduce economic uncertainty and remove its implicit guarantee to nonviable firms.
Keywords： Deleveraging; Debt Rollover; Zombie Firms; Economic Uncertainty
JEL Classification： G21, G33, G11

Summary： It is well recognized that monetary policy rules have an important impact on the macroeconomy. Wellgauged monetary policy can stabilize economic activities and foster growth, whereas misused policy rules can lead to severe economic fluctuations and, in extreme cases, financial crises. Therefore, it is crucial to investigate the effects of alternative policy rules on the economic environment and the desirability of different rules. Using a stylized New Keynesian dynamic stochastic general equilibrium (DSGE) model, this paper studies the impact and desirability of three widely used monetary policy rules: the money supply rule, the Taylor rule, and the forward looking interest rate rule.
A key departure from the literature lies in our methodology. We compare the “policy space” of alternative policy rules, which enables us to get a sense of under which policy regime central banks have the most freedom to influence the policy instrument, inflation, and output. To the best of our knowledge, this issue has not been investigated. In this study, we define the policy space as the range of three parameters in policy rules: the parameters on the policy instrument, inflation, and output. Importantly, any combination in the range (either a three or two dimensional space) has to have a unique equilibrium. In other words, a combination outside the range would either have no equilibrium or multiple equilibria. We argue that a good monetary policy rule should give policymakers the most degrees of freedom to influence macroeconomic targets, meaning a larger policy space.
By comparing the policy space of three monetary policy rules, two results are worth highlighting. First, we find that, in general, the money supply rule is the least desirable as its policy space is the smallest, whereas the forwardlooking interest rate rule is the most desirable. Second, when central banks are more concerned with controlling inflation, the Taylor rule is more desirable than the forwardlooking interest rate rule, as it yields a larger range for central banks to respond to inflation.
In addition, we study the welfare implications of alternative policy rules. Our welfare analysis shows that in all cases, welfare is increasing as policy rules respond to macroeconomic targets (the policy instrument, inflation, and output) more aggressively. Furthermore, in general, when policy rules respond less aggressively to targets, the forwardlooking interest rate rule yields the highest level of welfare. When monetary policy responds more aggressively to targets, the Taylor rule is the most desirable.
Finally, we consider two interesting cases in which monetary policy is primarily designed for economic growth or for inflation stabilization. Our simulation results show that when monetary policy is aimed at boosting economic growth, the money supply rule is desirable. When central banks are most concerned with inflation stabilization, the Taylor rule is the most effective monetary policy rule.
Our study makes a contribution to our understanding of alternative monetary policy rules and their broad impacts on the macroeconomy. We conclude that every policy rule has its pros and cons and that central banks need to exercise discretion in choosing appropriate policy rules. In terms of the policy space, the money supply rule is the least desirable. The forwardlooking interest rate rule gives the most freedom to control all targets, but when policymakers are most concerned with inflation, the Taylor rule is the most desirable. In terms of welfare, the forwardlooking interest rate rule yields the highest level of welfare when policy rules respond less aggressively to macroeconomic targets, and the Taylor rule is desirable when monetary policy responds more aggressively to targets. Finally, the monetary supply rule can be desirable if central banks want to boost economic growth, whereas the Taylor rule is most effective in controlling inflation.
Keywords： Monetary Policy Rules; Policy Space; Welfare Losses; Policy Targets
JEL Classification： E12, E52, E58

Summary： In China, labor scarcity in the manufacturing industry and the rapid rise of housing prices have co-existed since 2004. First, labor costs in China's manufacturing industry have risen consistently since 2004. Labor scarcity has become a serious problem for China's manufacturing firms and “snatching labor” is now an important annual task for many firms in eastern coastal cities. Second, the constraints of land resources on China's economic development have intensified. After China implemented reforms in its housing market and land-supply system in 2003, housing prices increased significantly and the construction industry expanded rapidly.
Does the increase in housing prices and the expansion of the construction industry affect employment in the manufacturing industry and the employment structure of the manufacturing and construction industries? It is crucial to evaluate the economic effects of increasing housing prices and to understand the development or transformation of China's manufacturing industry. According to Robertzinski's theorem, an increase in housing prices leads to an expansion of the construction industry and increased wages, causing more laborers to move into the construction industry. The construction industry, which includes construction, installation, and decoration, is labor-intensive and needs many low-skilled laborers, who are also in demand by the Chinese manufacturing industry. Therefore, an increase in housing prices and an expansion of the construction industry draws workers away from the manufacturing industry, exacerbating the employment problem in the manufacturing industry and resulting in a structural employment mismatch between the manufacturing and construction industries. In addition, Chinese governments always use housing markets and land markets to spur economic growth and increase local finances, leading to a larger rise in housing prices and accelerating the flow of labor and other resources to the construction industry. The manufacturing industry must raise wages and their traditional comparative advantages are obviously weakened. Because it is not the same as a shortage of labor supply, such wage increases and employment scarcity in manufacturing caused by increasing housing prices hide the real decline in comparative advantage, as it is a deviation in the industrial structure away from local actual comparative advantages. This can even lead to “Dutch disease”.
To identify the effects of increasing housing prices on China's manufacturing employment, we conduct an empirical analysis following Charles et al. (2012, 2013), using panel data covering Chinese cities from 2004 to 2013. We prove that an increase in housing prices in China significantly affects the employment structure of the manufacturing and construction industries and reduces the employment absorptive capacity of the manufacturing industry relative to the construction industry. Our extensive analyses also find that (1) the effects of housing prices depend on region and time, (2) increases in housing prices significantly decrease employment in China's manufacturing firms but expand employment in construction firms, although these effects are heterogeneous and depend on firms' factor-intensity, ownership, and other characteristics, and that (3) increasing housing prices also raises wages in China's manufacturing and construction firms but reduces wages in China's manufacturing industry relative to its construction industry.
Our study provides a new perspective for understanding the economic effects of housing prices and the development of the manufacturing industry in China. It also has policy implications for the Chinese government. The government must realize that the excessive growth of housing prices in China has hindered the development of the manufacturing industry and may lead to more serious problems in unemployment and social stability in the future. Therefore, it is important for Chinese governments to deal with the relationship between increasing housing prices and economic growth, between increasing housing prices and the development of the manufacturing industry, and between increasing housing prices and labor skills training.
Keywords： Increasing Housing Prices; Expansion of the Construction Industry; Employment of the Manufacturing Industry
JEL Classification： E24, J21, N60

Summary： Urban economics scholars find that homeownership and public service satisfaction affect public participation. Homeownership mainly affects public participation through three mechanisms. First, homeownership has a “lock-in effect”. Second, homeowners have more motivation to improve their house than renters. Third, homeowners usually stay in the community longer, leading them to pay more attention to the community environment. Similarly, public service satisfaction affects public participation in two different ways. One is the “negative voting hypothesis”. The second is the “alienated hypothesis”. Of course, these two hypotheses are not mutually exclusive.
While there is some empirical work on homeownership, public service satisfaction and public participation, most studies focus on developed countries, with few studies considering China's special background. However,there are significant differences between China and other countries in public participation and the public service of local government. First, in terms of public participation, there is a residents' committee elected by all residents at or above the age of 18 or by representatives of each household. The committee can also be elected by each resident team on behalf of two or three people. In the United States, there are various positions in community elections and community affairs. Second, in terms of public service supply, house property tax is an important source of fiscal revenue for local government in the United States, so homeowners have a motive to vote for government officials who can boost their house prices and improve their local public services. While most local governments in China have no house property tax revenues, the residents' committees have six obligations, which include providing public services. The Chinese community residents' committees perform many administrative roles and fulfill a series of autonomous functions (Li, 2009). Of course, even if the election form gives citizens limited options, Chinese citizens still vote to express their demands (Shi, 1999) and public service satisfaction still affects public participation in China (Xiong, 2012). Therefore, homeownership and public service satisfaction may affect public participation in different ways that need to be tested using Chinese data.
This paper uses micro survey data in China to study this issue for the first time, and contributes in the following areas. First, it tests the effects of homeownership and public service satisfaction both on institutionalized and non-institutionalized public participation. Second, it uses the house land supply per capita and financial autonomy of each city as instrumental variables to test the effects of homeownership and public service satisfaction. Third, it investigates the link between homeownership, public service satisfaction and public participation from the perspective of urbanization and the hukou system, making up for the lack of related research in China.
The study finds that complete homeownership has a significantly positive effect on institutionalized public participation and shared homeownership has no significant effect. Both kinds of homeownership have no significant effect on non-institutionalized public participation. Individuals who are dissatisfied with public services are less likely to participate in institutionalized politics, but more likely to participate in non-institutionalized politics. Further analysis finds that residents with local hukou and who are not satisfied with public services are less involved in institutionalized public participation, which supports the “alienation hypothesis”. The probability that homeowners without local hukou and who are not satisfied with public services will participate in institutionalized and non-institutionalized public environments is higher than for others residents, supporting the “negative voting hypothesis”.
Therefore, in view of the generalized virtual economic attributes of homeownership and its heterogenous influence, increasing the housing supply to account for migration and improving the quality of public services could effectively expand public participation and promote economic development and social equality.
Keywords： Homeownership; Public Service Satisfaction; Local Hukou; Public Participation
JEL Classification： J61, J68, H31

Summary： The rapid economic growth after China's opening up is undoubtedly related to its quest for maximum efficiency, but the issue of fairness has not been adequately addressed and resolved. Fairness has long been a major bottleneck restricting China's economic development. Urbanization has mirrored the steady growth phase of China's economy. Can we balance efficiency and fairness in this process? Unfortunately, urban economic theory rarely considers the issue of income distribution. Both Krugman's new economic geography and Henderson's urban system theory focus on maximizing efficiency. However, neither studies the optimal level of urbanization nor considers the indicators of income distribution or inequality in the objective function. The literature on the optimal level of urbanization is sparse and urbanization studies that balance efficiency and equity are completely missing, even though many papers assume that there is an optimal urbanization rate or optimal urban system (Henderson, 2003; Au & Henderson, 2006).
This paper contributes to the literature by filling these important gaps. First, we develop theoretical models of urbanization that shed light on the optimal levels of urbanization. We construct a laissez-faire urbanization model that does not consider distributional issues, followed by a socially optimal urbanization model that accounts for inequality. We use the social welfare function of Sen & Foster (1997), where equity is represented by the well-known relative income inequality measure, the Theil-L index. The corresponding optimal level of urbanization is then compared with what is optimal without equity considerations. In addition to these theoretical contributions, we provide empirical evidence that supports the predictions of our theoretical models. For this purpose, we construct a provincial level panel data set from China and estimate a set of regression models to evaluate the impact of equity considerations on the level of urbanization. Finally, we explore possible transmission mechanisms from equity considerations to urbanization, empirically establishing two transmission channels.
Our major theoretical finding is that including equity leads to higher levels of, or faster, urbanization than otherwise. The regression results confirm the theoretical prediction. The key explanatory variable of “equity consideration” is constructed by scanning words related to inequality or distribution in the most important policy document, the annual government report delivered by provincial governments in early March of each year. The results show that equity considerations lead to a higher rate of, or faster, urbanization. Our modeling results are robust to different model specifications, different migration flows, and the possibility of endogeneity.
Finally, the transmission mechanisms from equity considerations to urbanization are explored. Policymakers are aware of the dominant role of the urban-rural divide in national inequality and poverty in developing economies. To bridge this gap, urban-rural connectivity and jobs for underemployed or unemployed farmers are most crucial. These require investment in road infrastructure and industrial development, which are expected to promote migration and urbanization. Our empirical findings on the significant correlation between equity considerations and road density or industrial loans in China help establish two channels that transmit equity considerations to urbanization.
The policy implication of this paper is clear: actively promoting urbanization could lead to gains in overall social welfare when tangible or intangible migration costs are large. This implication may not have been realized by policymakers and other stakeholders. Consequently, the prevailing practice in most developing countries of restricting or slowing migration and urbanization should be reversed. Of course, it is important when promoting urbanization to carefully craft，plan and implement urbanization strategies and policies that alleviate or even avoid various urban diseases.
Keywords： Urbanization; Income Inequality; Social Planner; Social Welfare Function
JEL Classification： O18, E61, D63

Summary： Since its opening-up, China has chosen a discretionary fiscal policy whenever there have been economic tremors. This policy has alleviated economic fluctuations. However, it has also had negative impacts on the macro economy. This paper contends that, when confronted with a huge-scale economy with a complex structure such as China's, it is very difficult for decision makers to enforce a precise and effective discretionary fiscal policy with few side effects in the pursuit of economic stability. Therefore, automatic fiscal stabilizers are particularly important. However, Chinese researchers have not paid enough attention to the study of automatic fiscal stabilizers.
China's existing social security system and transfer payment system are not strong enough to be the most important automatic fiscal stabilizers because the scale of the economic resources involved is relatively small. Therefore, the most important automatic stabilizer is the tax system. However, differing from developed countries, China's tax system still has the obvious characteristics of its dual economic structure and the tax structure is heavily weighted towards indirect taxes. This paper is particularly concerned with whether the dual economic structure and the high proportion of indirect taxes have hindered China's tax system from playing its role as an automatic stabilizer fully.
By constructing a dynamic stochastic general equilibrium (DSGE) model that captures the characteristics of China's dual economic structure, this paper sheds light on the relationship between the characteristics of the dual economic structure, the proportion of indirect taxes, and output volatility. The findings of this study can be summarized as follows. First, following the weakening of dual economic structure resulting from the decrease in the gap between urban and rural productivity, employment discrimination against rural migrant workers, and changes in the proportion of rural residents, the effectiveness of the tax system as an automatic stabilizer is enhanced. Second, with the growth of the proportion of indirect taxes of total revenue, the ability of the tax system to function as an automatic stabilizer is weakening. Third, the growth of income tax progressivity has a positive impact on the effectiveness of the tax system as an automatic stabilizer, but the impact is weak because of the low proportion of income tax in total tax revenue. Lastly, whether the heterogeneity of residents is considered or not, the dual economic structure and the high proportion of indirect taxes have always hindered taxation from fully functioning as an automatic stabilizer. Based on these conclusions, we confirm that the high proportion of indirect taxes and the dual economic structure have placed “dual constraints” on the effectiveness of China's tax system as an automatic stabilizer.
To allow taxation to play the role of automatic stabilizer better, efforts should be made in the following ways. At the national level, the progressivity and the proportion of income taxation should be increased. Less developed western provinces should take a “two-pronged” strategy to weaken the dual economic structure and reduce the proportion of indirect taxes. Provinces in the central district should focus on the weakening of the dual economic structure. Eastern developed provinces should consider accelerating the reform of real estate taxes to improve the proportion of direct taxes of total tax revenue.
The study makes the following contributions. First, this paper theoretically analyzes the effects of a dual economic structure and a high proportion of indirect taxes on the effectiveness of taxation as an automatic stabilizer. It proves that these constitute “dual constraints” by conducting numerical simulations and econometric analyses. Second, this paper constructs a DSGE model that embodies the characteristics of the dual economic structure and covers the main types of taxes, and then extends the model to analyze the impacts of residents' heterogeneity and income tax progressivity. Third, the conclusions of this paper provide an important theoretical basis for the goals of China's new-type urbanization and the orientation of the tax system reform.
Keywords： Tax System; Automatic Stabilizer; Indirect Taxes; Dual Economy; Dual Constraints
JEL Classification： H20, P25, E62

Summary： Since China's economic growth started slowing in 2012, ways to boost the economy and promote high quality development have gained more and more attention from all sectors of society. The central government has focused on building a powerful new driving force for economic growth by accelerating supply-side structural reforms. Lowering costs is an important part of these reforms. As taxes account for a significant share of enterprise costs in China, many people have called for tax cuts. Others have questioned the scope of the tax cuts and whether they will have the desired impact. This dispute reached a climax when the Trump Administration introduced its plans for tax cuts. The key to resolving this debate and choosing the appropriate policies is to precisely evaluate the effect of tax cuts in China.
The recent literature focuses on the evaluation of value-added tax (VAT) reform but has yet to come to a concrete answer. China started to reform its VAT system in six industries in the northeastern region in 2004. Reform gradually spread to the whole country and to the manufacturing industry in 2009. The VAT reform allows firms to deduct fixed assets from their taxation base. Some empirical studies use China's VAT reform as an identification strategy to explore the effect of tax incentives but face two limitations. First, many of the studies may be biased as the timing, industries and locations of VAT reform are endogenous. Second, most studies focus on the tax incentives for investment, employment and export. These are partial effects and do not account for the aggregate effect on firms' output or efficiency. While the aggregate effect of tax reduction on the economy is drawing more attention (see, for example, Romer & Romer, 2010, who use time series data to measure the U.S. tax multiplier), the macroeconomic effects of tax changes in China have been ignored.
This paper uses the 2002 Income Tax Sharing Reform to identify the aggregate effect of tax reform on firms' value-added per capita. The reform assigns responsibility for the taxation of enterprises to two different tax agencies according to a firm's establishment date: the National Tax Bureau for enterprises registered on or after January 1, 2002, and the Local Tax Bureau otherwise. Local tax bureaus share the same interests as the local government (of which they are a part), while the National Tax Bureau is supervised by the central government and is therefore more independent from local governments. Theoretically, enterprises established before January 1, 2002 are expected to enjoy a lower tax burden, as local governments and local tax bureaus should set lower tax rates to keep locally registered companies from moving to other regions. Using a sharp regression discontinuity design based on the above-scale industrial firm-level data from 2003 to 2007, which are maintained by the National Bureau of Statistics of China, this paper finds support for the hypothesis that the effective tax rate for enterprises set by local tax bureaus is 1.99% lower than the rate set by the National Tax Bureau.
Further analysis concludes that the growth rate of value-added per capita for firms established before January 1, 2002 is 6.43% higher than for firms established after December 31, 2001. This finding implies that a one-percentage-point tax rate decrease would raise firms' value-added per capita growth rate by 3.2% on average.
This paper makes two major contributions. First, unlike other studies of the partial effects of tax incentives on enterprises, this paper studies the overall impact of tax cuts on firms' value-added growth rates and finds a positive correlation between the two factors; that is, tax cuts increase companies' growth rates. Because firms are the most important drivers of economic growth and value-added statistics are a key element of GDP, this paper provides strong support for the argument that tax cuts promote high quality economic growth.
Second, using a sharp regression discontinuity design to analyze the 2002 Income Tax Sharing Reform, this paper arrives at a much more reliable estimate, as it avoids the limits imposed by selection bias in studies that investigate VAT reforms. This is different from all other research on the effect of China's tax changes.
Keywords： Tax Changes; Income Tax Sharing Reform; Effect of Tax Changes
JEL Classification： D24, E62, H20

Summary： China has been pursuing an opening-up policy focused on the manufacturing sector for more than 30 years. The opening of services started after China's WTO accession with the elimination of foreign equity restrictions. Because services are important intermediate goods in manufacturing, the impact on downstream manufacturing firms' behavior is important to measure when considering the gains brought by service opening. This paper investigates the heterogeneous effects of services opening on downstream manufacturing export performance both theoretically and empirically. It constructs a firm-level trade model to clarify the export effect of upstream service opening and then measures the impact of the foreign equity restriction policy adjustment.
Recent studies focus on the trickle-down effects of services opening on downstream manufacturing firms' productivity (Bas & Causa, 2013; Blourès et al., 2013; Arnold et al., 2016). We extend this topic by exploring the relationship between service opening and manufacturing firms' export performance. From a theoretical perspective, the export promotion effects of service opening result from not only improvements in productivity but also reductions in export costs. This paper is the first to investigate how service opening affects firms' export performance with different levels of managerial efficiency. On the one hand, firms with a high level of managerial efficiency tend to choose the most suitable service input when facing the same opening in services (Lev & Radhakrishnan, 2005). On the other hand, firms with a high level of managerial efficiency use their service inputs better (Lev & Radhakrishnan, 2005; Bloom et al., 2008). Firm heterogeneity in managerial efficiency is therefore key to understanding the different gains from service opening at the firm level.
This paper develops a firm-level theoretical framework to prove that service sector opening has affected manufacturing firms' export performance by reducing costs. The effect of service opening on firm export performance depends on firms' managerial efficiency. Using the Schedule of Specific Commitments on Services of China and official documents about foreign equity in the service sector issued by the Chinese government, we measure the opening of services from the perspective of foreign equity restrictions, which removed the full prohibition of foreign investment, restrictions on majority holdings and limits on total foreign ownership. Next, we use input-output tables to measure the openness of the upstream service sector between 1997 and 2007 and match manufacturing firm-level data provided by the National Bureau of Statistics of China to test the relationship between the openness of the service sector and downstream firms' export performance.
The results show that removing restrictions on foreign equity limits in the service sector significantly increases the probability of exporting and the extent of export sales by downstream manufacturing firms. However, the effect weakens with increasing openness to foreign equity. We also find that the effect from service sector opening is stronger for firms with greater managerial efficiency. The core findings are robust to alternative measures of service openness, excluding processing firms and specifications that deal with potential reverse causality concerns.
The results suggest that removing foreign equity limits in the service sector improves the export performance of downstream manufacturing firms by reducing both variable and fixed export costs. To sustain the growth in Chinese export and optimize the export structure, services should be further opened, especially in service sectors that are very important inputs for the manufacturing sector. At the same time, tools such as the prohibition of monopolies and the introduction of market mechanisms are needed to keep the effects of opening services from decreasing. Downstream manufacturing firms should improve managerial efficiency to maximize their gains from opening services.
Keywords： Service Opening; Firm Export; Foreign Equity Openness; Managerial Efficiency
JEL Classification： F1, L88, O12

Summary： Many Chinese non-financial firms have invested heavily in non-cash financial assets. This is viewed by the media as evidence that Chinese non-financial firms are not engaging in their core businesses. This is the first paper to comprehensively study this phenomenon. Based on a hand-collected dataset of listed firms in China's stock market covering 2007 to 2014, our empirical research finds that 69.2% of listed non-financial firms have invested in risky financial assets, which account for 5.6% of their book value and 24.1% of their total financial asset portfolio.
Inspired by the cash holding theory, we examine the causality and find a negative causal effect between stock returns and the risky financial asset holding of industrial listed firms. This negative causal effect is particularly salient for financially constrained firms. Our research also shows that there is a non-linear relationship between the negative causal effect and firm profitability. We discuss the motivation for risky financial asset holdings by non-financial firms. We find that there is a positive relationship between financial asset holdings and risky financial asset holdings. Our results show that firms with poor governance, overconfident management, and diversified business are more likely to hold risky financial assets. To correct for the bias caused by the abnormal investment behavior of newly listed firms, we use balanced panel data to re-estimate the models. The results are the same.
This article makes the following contributions to the literature．First, this is the first paper to our knowledge to do such a study in a developing country with an imperfect capital market. We discuss systematically the market effect and the motivation for financial asset holdings by non-financial listed companies in the industrial sector in China. Our paper fills the gap left by studies such as Brown (2014), Song & Lu (2015) and Duchin et al. (2016). Second, by considering development and innovations in the financial market, this paper enriches the theory of cash holding. Our study differs from others by breaking the originally narrow definition of cash and re-evaluates the value of non-financial firms' risky financial assets and safe financial assets. Third, the results reveal that holding risky financial assets is a very important factor affecting a company's asset pricing. Our paper enriches asset pricing theory in capital markets. The results demonstrate that companies currently lack investment opportunities in China. They also shows that poor corporate governance and the investment impulse are due to the overconfidence of management. Finally, our study discusses the relationship between industrial capital and financial capital and helps to clarify the boundaries of financial firms. Furthermore, the paper provides extensive evidence at the micro level of the development of rules for financialization, the virtual economy, and real economy hollowing.
This article also has policy implications. The regulatory agency should pay more attention to the phenomenon of non-financial firms holding bulk financial assets. Moreover, to improve the financing efficiency of the capital market, direct capital flows, and regulate financial risks, the regulatory agency needs to clarify the boundaries of financial firms and to strengthen the regulation of non-financial firms' financial asset holdings.
Our results reflect the current difficulties experienced in China's financial and industrial development. Behind the rapid expansion of monetary and financial assets is the unbalanced development of finance and industry. It is important for the financial sector to truly serve the financing needs of the real economy. With this background and because the industrial sector holds a large number of financial assets, the main priority is to strengthen the disclosure of financial assets held by companies, increase the transparency of companies' investment behavior, and reduce the information asymmetry between investors and companies. The second priority is to strengthen the supervision of financial assets held by non-financial companies. This can mean strengthening the auditing and supervision of companies' financing behavior to ensure that the use of funds is consistent with stated fundraising goals. It can also mean that the regulatory agency may want to use the financial asset holdings of a firm to set the boundary between financial and non-financial firms and to evaluate whether a firm is deviating from its core business.
Keywords： Industry Sector; Financial Assets; Market Effect; Holding Motivation
JEL Classification： G10, G12, G32

Summary： Understanding the economic behavior of Chinese farmers is necessary to comprehend the impact of commercialization and marketization on Chinese rural economy and the rest of the Chinese economy. Until now, the academic understanding of the performance of China's modern economy has fallen into two inconsistent camps. One, represented by Philip Huang, believes that China's economy grows without development. The other, represented by Ramon Myers, claims that China has made economic progress in modern times. To explain the behavior patterns of farmers, there are both Schultz's “reasonable small-scale peasant” theory and Chayanov's “substantial small-scale peasant” concept. How exactly do Chinese farmers perform in practice? This paper uses data from the first and the second Wuxi and Baoding Rural Surveys to analyze the behavior patterns of rural households in northern China.
Wuxi and Baoding Rural Surveys were initiated in the 1930s under the charge of Chen Hansheng and a few other primary members. In 1958, the second survey was conducted by Sun Yefang and Xue Muqiao. The third and the fourth surveys were carried out in 1987 and 1998, respectively. The survey was a continuous follow-up survey of rural households in the same geographical areas (Wuxi and Baoding), spanning about 70 years. The unit of observation of this survey is a single rural household. The research value of this data can be compared with the South Manchurian Railway Company Survey and John Buck's farm survey. However, although the existing literature pays much attention to the latter two, relatively little attention has been paid to Wuxi and Baoding Rural Surveys and quantitative research on northern China is almost nonexistent.
This paper uses the Baoding data to enrich the academic discussion of rural areas in northern China. It quantitatively identifies the land market, labor market, and non-agricultural employment situation of 11 villages in Qingyuan (Baoding) in the 1930s and 1940s. Based on this, the rural households' choice behavior in the factor market and the influence of this choice on household per capita income are quantified. The study finds that, compared with the Yangtze Delta, the land market and labor market in the rural areas of Qingyuan (Baoding) are relatively underdeveloped and quite different from those of the rural areas in the developed industrial and commercial parts of southern China. More specifically, the labor market is more active than the land market in Qingyuan, but the scale of the land market is larger in southern China.
This paper also notices that, although the land and labor markets in the 11 villages of Qingyuan are relatively underdeveloped, farmers can still allocate their resources through a factor market in an economically rational way. The effect of this configuration on household per capita income is generally positive. This shows that it is perhaps more appropriate to understand the behavior patterns of rural households in northern China within the framework of “reasonable small-scale peasants”. Moreover, we also believe that non-agricultural employment is very important for the continuous improvement of rural household per capita income. These conclusions not only help to further understand the performance of China's modern economy, but also have policy implications for the modernization of China's agricultural and rural regions.
This paper is empirical, mainly using the quantification method, and assumes that the behavior of rural households is consistent across time and villages. Taking this research as a starting point, subsequent studies could focus on the following topics. First, unbalanced panel data could be constructed by analyzing materials like genealogy and family settlement deeds. Second, based on the construction of panel data, it would be helpful to analyze how the land market has changed the land allocation of peasant households. Other interesting topics include quantifying how human capital behaves between generations and how it affects family economic decision-making, and the roles of women and children in the economic development of rural households.
Keywords： Farmers; Economic Rationality; Baoding Rural Surveys; Non-agricultural Employment
JEL Classification： N55, O10, C80

Summary： The sinicization of western economic theories is the selective and critical application of western economic theories to China's real economic problems. The creative transformation and innovative development of western economics lead to economic theories with Chinese characteristics that enrich modern economic theories. The process of sinicization is a natural outcome of China turning its attention to its own transformation and development after absorbing foreign economic theories. A survey of the sinicization of western economic theories in modern China (from 1840 to 1949), not only is conducive to the systematic organization of economic theories with Chinese characteristics in history, but also could lead to further exploration of the specific path of the sinicization of western economic theories, providing historical references for the development and improvement of a socialist economic theory system with Chinese characteristics.
The sinicization of western economic theories proceeds in four steps: selection, adaptation, development and innovation. With greater dissemination, growing demand and knowledge improvement, this process has advanced by establishing goals, achieving academic sophistication and producing results. First, modern Chinese scholars tried to understand the inherent logic and scope of application of different western economic theories and schools. Then, considering China's actual conditions, Chinese academics made judgments on the relevancy of these theories. This was reflected in such debates as “Is the Historical School more progressive than the Classical School?” and “Should the Chinese economy be based on agriculture or industry?” The study of western economic theories enabled scholars to adapt existing theories to solve China's problems and restructure China's economic system. This was a common phenomenon in modern China, especially in the development of its fiscal and financial systems. At a deeper level of sinicization, scholars also developed original theories. In modern China, economic students returning from overseas made outstanding contributions, such as Fan Hong's complementary comment on the Fisher equation, Wu Daye's discussion of economic inflation, and Liu Dazhong's explorations in econometrics. The highest level of sinicization was seen in the “Chinese Schools of Economics”. These emerged in the 1930s and formed a consensus in the 1940s. During this period, Wang Ya'nan, Ma Yinchu and other scholars studied the necessity, definition and system of Chinese schools of economics. Original achievements were also made in fields such as the history of Chinese economic thought, China's industrialization and development economics, and the economics of people's livelihood.
This progress proved that the sinicization of western economic theories in modern China not only held true logically but also left traces in history. Based on an extensive collection of historical materials and case studies, and with a focus on the progressive pattern of the sinicization of western economic theories in modern times, this paper systematically reviews modern Chinese scholars' theoretical explorations of sinicization that were based on the study and application of western economic theories to promote economic development in China. This progression resulted in sinicized theories through selection, adaptation, development and innovation. The efforts of these modern scholars not only promoted the analysis and transformation of China's macro and micro economy, but also made theoretical contributions to economics.
Finally, this paper argues that the cognition and requirement for the study of western economic theories should not be limited to “how to use it properly” and “how to use it well,” but should also consider China's economic reforms and developments to establish a system of economics that systematically summarizes the Chinese experience and seeks breakthroughs in basic theories or even a brand-new Chinese paradigm. This conclusion deserves attention of contemporary Chinese economists.
Keywords： Sinicization of Western Economic Theories; Chinese Schools of Economics; Choice and Innovation
JEL Classification： B10, B20