Summary： With the fast growth in China's services in recent years, the percentage of services in China's GDP has increased. The percentage of value added by services in China's GDP reached 516% in 2016, exceeding the contribution of the next largest industry by 118%. Tremendously large regional imbalances also exist in China. The regional imbalances in China's growth in services, measured by the proportion of services in GDP, the value-added by services and the value-added per capita by services, have become increasingly intense. This paper investigates these regional imbalances from the perspective of the difference between the actual strength and the optimal strength of intellectual property rights protection (IPR).
Because services are a vital part of the economy, this paper explains regional imbalances in services using econometric models derived from economic growth theories. An analytical framework is constructed that reveals the mechanisms by which differences between the actual and optimal strengths of IPR affect the regional imbalances in China's growth in services. Both direct and indirect verification are used as an empirical exercise. The impact of differences between the actual strength and the optimal strength of IPR on regional imbalances in China's growth in services is indirectly verified using subsamples of eastern, central and western China. Next, this paper directly verifies this impact by constructing variables capturing the regional imbalances in China's growth in services and the differences between the actual strength and optimal strength of IPR. To resolve the issue of endogeneity in the empirical model, a distance index and the railway density are used as instrumental variables (IVs). As a robustness check, this paper tests the effect of differences between the actual and optimal strengths of IPR on regional imbalances in China's growth in services with micro-data. This is seldom done in the literature on service economics and contributes to the search for micro-foundations for the regional imbalances in the growth in services. Provincial panel data and micro-data for services are obtained from the China Statistical Yearbook of the Tertiary Industry, the Statistical Yearbook for each province and the WIND Database on China's listed companies.
This paper draws three conclusions. 1) IPR promotes growth in whole services and knowledge-intensive services with inversed U-shaped features. China's current actual strength of IPR is below the theoretically optimal strength of IPR. 2) Eastern China, central China and western China have different theoretically optimal strengths of IPR and no region has reached its optimal level. 3) The differences between the actual strength and optimal strength of IPR in the three regions account for much of the regional imbalances in China's growth in services. Compared with eastern China, the differences between the actual strength and optimal strength of IPR in central and western China are large, leading these two regions to fall behind eastern China in service growth. Consequently, the three regions can strengthen their IPR, reducing the difference between their actual strength and optimal strength of IPR and promoting growth in services. Furthermore, central China and western China can catch up with eastern China by reducing the difference between their actual strength and optimal strength of IPR, alleviating regional imbalances in China's growth in services.
This paper makes three contributions. First, it studies regional imbalance in China's growth in services, a situation that lacks in-depth study by academics despite having long been a puzzle. Second, it analyzes the mechanisms behind the imbalances in growth in services from the unique perspective of differences between the actual strength and optimal strength of IPR. Third, it constructs unique instrumental variables based on a distance index and railway density to resolve endogeneity issues and uses micro-data seldom used in service economics for empirical tests to reduce estimation bias.
Keywords： Intellectual Property Rights Protection; Growth in Services; Optimal Strength; Regional Imbalances

Summary： This year marks the 40th anniversary of China's reform and opening-up. Over the past 40 years, China's economic development has achieved remarkable achievements. Overall national strength has significantly improved, as have living standards. As a core indicator reflecting economic development, China's GDP plays an important role in macroeconomic decision-making. At the same time, GDP describes the miracle of China's economic development over the past 40 years and records the glorious history of China becoming the second largest economy in the world. This paper fully reviews the development of China's GDP accounting from its establishment through its gradual maturity, summarizes the major reforms and improvements in the history of China's GDP accounting and looks forward to further reforms and developments of China's GDP accounting in the new era.
From the early 1950s to the early reform and opening-up period, the core indicator in China's national accounting was the national income of the MPS. National income reflects the results of production activities for material goods but does not reflect the results of production activities for non-material services. Along with the gradually deepening of reform and opening up, China's non-material service production has developed rapidly, playing an increasingly important role in the economy. To meet the needs of macroeconomic management, GDP accounting based on SNA was established in the 1980s. In contrast to national income, GDP reflects both the results of production activities for material goods and the results of production activities for non-material services and so measures the results of economic development more comprehensively. In the early days, national income and GDP were used in parallel; however, with the development of China's market economy, the importance of GDP has become more and more prominent and its position in China's national economic accounting has risen gradually. In the early 1990s, GDP replaced national income as the core indicator of China's national economic accounting.
China's GDP accounting has undergone a series of reforms and development, and its concept, classifications and accounting approaches have undergone a series of evolutions. Both the standardization of GDP accounting and its consistency with international standards have continuously improved. At present, China's GDP accounting is in line with the basic principles of SNA 2008 in its concepts, scope and accounting methods. Because macroeconomic analysis and management need continuous and comparable GDP time series, the National Bureau of Statistics of China estimated historical GDP data for before the establishment of the GDP accounting system in 1985. In accordance with international practice, it is necessary to revise historical GDP data when there are major changes in the data sources or accounting approaches. Due to this principle, the historical data on China's GDP have been comprehensively and systematically revised several times according to the changes in data sources from the economic census and the reforms of accounting approaches.
After more than 30 years of reform and development, China's GDP accounting has been greatly improved. However, compared to the GDP accounting practices of developed countries, there is still a gap. The rapid development of China's economy requires economic management that constantly produces new demands for statistics and GDP accounting changes, which lead to further reform and development. These changes allow China's GDP accounting to better reflect the new changes in the Chinese economy as it transforms from a high speed growth stage to a high quality development stage, and helps GDP accounting to better serve the economic and social development goals and to improve international comparability. There are still many aspects of China's GDP accounting practices that need further reform and development, including reforms on owner-occupied dwelling services estimation, financial services estimation, expenditure-based GDP estimation, GDP estimation at constant prices, quarterly GDP estimation and regional GDP estimation. This paper discusses these aspects and makes suggestions for the future reform and development of China's GDP accounting.
Keywords： GDP; National Accounts; Accounting Methods

Summary： China adopted the explicit deposit insurance scheme (DIS) on May 1, 2015. The adoption of the explicit DIS is an important step allowing the Chinese government to forestall systemic financial risks. It is worth noting that the governments of countries that adopted the explicit DIS earlier, such as the U.S., provided little implicit protection for their banking sector. In contrast, the Chinese government offered implicit blanket deposit insurance for banks prior to its implementation of the explicit DIS because of the systematic importance of the banking sector to China's real economy. Therefore, it is difficult for China to learn from the experiences of developed countries such as the U.S..
For countries like China, of which the governments offered an implicit blanket guarantee to both gigantic state-owned commercial banks and small rural and urban credit unions, the adoption of the explicit DIS has not only a direct impact on the banking sector, but also a spillover effect on other parts of the financial system. After the adoption of the explicit DIS, the government no longer has the responsibility for providing full financial support to banks, and bank exits become possible. Therefore, the direct effect of the explicit DIS on the stability of China's banking sector is likely to be negative. However, the total fiscal position will likely not deteriorate as much as it did during earlier episodes. Therefore, the “spillover effect” of the explicit DIS on the entire financial system could be positive.
This paper focuses on the countries that adopted the explicit DIS after the 1970s, which are similar to China. Based on data from 57 countries between 1970 and 2009, we investigate the impact of the explicit DIS on different types of financial crises. The results show that the explicit DIS increases the likelihood of bank exits but decreases the probability of other financial crises. The results are robust to the use of 2SLS regressions, an alternative definition of different types of financial crises, additional controls for global financial crises and different subsamples. We argue that the transition from implicit blanket deposit insurance to explicit DIS decreases protection for the banking sector but alleviates the burden on the government and other parts of the financial system.
Considering the recent heated policy discussions in China regarding China's Deposit Insurance Act, we further analyze the effects of three important design features on different types of financial crises. These features are the risk-adjusted premium, making banks the sole funding source and establishing an independent DIS agency. We find that the optimal design feature for the stability of the banking sector may not be the optimal one for the stability of the whole financial system. The results indicate that the risk-adjusted premium increases the likelihood of other financial crises but has no effect on the likelihood of banking crises. Making banks the sole funding source plays no relevant role in the rest of the financial system, but increases the likelihood of banking crises. An independent DIS agency increases the likelihood of both banking crises and other financial crises. Given these findings, we propose the government pay more attention to the impact of the risk-adjusted premium on other financial sectors, inject more money into the DIS agency and keep the DIS agency subordinate to the People's Bank of China.
Our work contributes to the existing literature in the following ways. First, we examine the impact of the explicit DIS on both the banking sector and other financial sectors, providing a more comprehensive landscape of the field. Second, given that the Chinese government provided an implicit DIS prior to the adoption of the explicit DIS, we take the existence of an implicit DIS into consideration and offer an alternative explanation of the impacts of the explicit DIS on different types of financial crises. Third, we analyze the effects of three important DIS design features on financial crises, including the risk-adjusted premium, the funding source and the independence of the DIS agency. The government should consider the potential effects on other financial sectors when designing the explicit DIS.
Keywords： Implicit Deposit Insurance; Explicit Deposit Insurance; Bank Exit;Financial crisis

Summary： Since China's reforms and opening-up, the importance of the financial industry to its economy has been continuously increasing. However, with the large expansion of the financial industry, the question of how to prevent the occurrence of systemic risk has become important and urgently needs to be answered. In China's financial system, the banking sector plays a leading role in indirect financing, so most of the risks in China's financial system are concentrated in the banking sector. Therefore, it is of great academic value and practical significance to measure the systemic risk of China's banking system and to carry out in-depth research on the components of this systemic risk and the factors influencing it. This will help improve the measurement of systemic risk and provide a valuable tool for the regulation of China's financial industry. It will also provide an important basis for the theoretical analysis and empirical testing of China's financial risk prevention system, helping to preempt the outbreak of risks within the financial industry and to create favorable conditions for the steady development of the Chinese economy under the new normal.
The literature often uses methods such as MES (Acharya et al., 2017); (Adrian & Brunnermeier, 2016) or SRISK (Brownlees & Engle, 2016) to measure systemic risk, paying less attention to the measurement of the contagion effect of the financial risk. Zedda & Cannas (2017) propose the “leave-one-out” method, which provides a new perspective for how to study financial risks in the banking sector. In combination with simulations and the SYMBOL model, the “leave-one-out” method effectively measures the systemic risk of large, medium and small banks and identifies the contagion component of systemic risk without using data from the securities market, overcoming the limitations of existing studies.
There have been no serious financial crises or large-scale defaults in China's financial market to date, making the simulation method more applicable when examining systemic financial risks in China. In this paper, we apply the “Leave-One-Out” method to investigate the systemic risks of 177 banks in China. On this basis, we analyze the proportion of contagion risk and the proportion of different types of banks' systemic risks in the banking sector's overall risk. Then, we study whether total assets, risk-weighted assets, capital, interbank liabilities, interbank assets and leverage are the determinants of systemic risk. We take into consideration the different types of banks in China, which include large commercial banks, joint-stock commercial banks, city commercial banks, rural financial institutions and other kinds of financial institutions. Finally, we analyze the diverse risk supervision regulations.
The main conclusions of this paper are as follows. (1) The systemic risk and the contagion risk in China's banking sector are increasing yearly and contagion risk is an important part of systemic risk in China. Moreover, due to the high proportion of contagion risks, it is not enough to guarantee that China's bank default rate is within 01% by only meeting the requirement for the level of capital adequacy ratio regulated in the Basel III agreement. (2) The results of a simulation analysis for bank classification indicate that the systemic risk and the contagion risk of the banking sector mainly originate from joint-stock commercial banks, followed by city commercial banks, while the systemic financial risks of large commercial banks are lower. (3) Increasing bank capital can significantly reduce a bank's systemic risk, while interbank debt aggravates the risk of contagion between banks.
Based on these results, we make three suggestions. (1) Because contagion risk has become an important part of the systemic risk for China's banking sector, we need to focus on banks' capital and interbank market liabilities to prevent the spread of contagion risk. (2) The results show that China's systemic risks mainly originate from joint-stock commercial banks and city commercial banks; therefore, we should strengthen the supervision of joint-stock commercial banks and city commercial banks to prevent the occurrence of systemic risk and safeguard the stability and safety of the financial market. (3) We need to construct a risk supervisory model for the banking sector, which has the capital adequacy ratio at its core and regards the leverage ratio, risk exposure and interbank liabilities as key inputs, to ensure financial security and achieve steady and sound economic and social development.
Keywords： Systemic Risk; leave-one-out; Contagion Risk; Banking System; Banking Regulation

Summary： This paper proposes a demographics-based systemic default distance measure and provides a completely new view of prudential regulation of the systemic risk of commercial banks in China from both theoretical and empirical perspectives.
Gray et al. (2008) introduced contingent claim analysis to study the default risk of banks and the systemic risk in the banking sector. The default distance (DD) of systemic risk is a widely used measure of the systemic risk of commercial banks. Its key ingredient, the interest rate, determines the level of systemic default distance. The literature shows that the age structure of the population determines the demand and supply of financial assets. Favero et al. (2016) used the ratio of young people to middle-age people (YM) to capture the persistent trend component of the target interest rate. Intuitively, demographics affect the level of systemic default distance through an interest rate channel. This paper is the first to connect demographics, the target rate and the systemic risk of banks. This leads to a new suggestion that regulators perform prudential regulation by watching a demographic variable, the YM ratio.
This paper contributes to the literature in both theoretical and empirical ways. From a theoretical perspective, we are the first to follow Favero et al. (2016) in modeling the target rate using a demographics-based Taylor rule. Furthermore, we extend the contingent claim analysis model, which measures systemic risk by calculating the default distance of both individual banks and the “aggregate one bank” by incorporating a demographics-based Taylor rule to model the target rate. Our theoretical results show that when the YM ratio is large (small), there will be excess demand for borrowing (saving) from banks. For markets to clear, equilibrium interest rates should adjust, increasing (decreasing) so that middle-aged people (young people) are encouraged to save (borrow). For banks, when the YM ratio is large (small), excess saving pressure is relieved (intensified) and total bank liabilities decrease (increase). Hence, a large (small) YM ratio reduces (enhances) the default risk of banks.
As an empirical exercise, we use data from the WIND database from January 2004 to December 2016. We first use the whole sample for estimation and show that there is a strong positive correlation between the YM ratio and the target rate. We then run 1-year ahead, 2-year ahead and 3-year ahead out-of-sample forecasts to show that the YM ratio perfectly captures the long term persistent trend in the future target rate. Finally, we calculate the systemic default distance of the 5 largest and the 16 listed commercial banks using the in-sample estimates and out-of-sample forecasted target rates, respectively. Interestingly, the demographics-based systemic default distances perfectly match the timing of both the 2014 financial stress and the 2015 stock market crash. The results also show that the 1980-1990 baby boom in China reduced systemic risk in 2010 because a younger population leads to excess demand and borrowing. We recompute the demographics-based systemic DD for the 5 biggest and the 16 listed commercial banks in 3 different scenarios: a normal period, an international financial crisis period and a stock market crash period. These results give the upper and lower bounds of the systemic DD so that the central bank can prudentially regulate systemic risk in these different scenarios.
Our results have the following important implications. First, the universal two-child policy will lead to comparatively low systemic risk for commercial banks in the next 80 years. Second, low fertility rates increase systemic risk because the YM ratio decreases. Third, regulators should keep an eye on the age structure of the population when performing prudential regulation of the systemic risk of commercial banks.
Keywords： Demographics; Policy Targeting Rate; Systemic Risk; Macro-prudential Regulation

Summary： This paper proposes a novel hybrid β, integrating macroeconomic policy factors and firm characteristic factors to detect systemic risk at the firm level in emerging economies such as China. A characteristic of China's economy is the striking contrast between the outstanding macroeconomic growth and the flat performance of listed firms. This hints at the distinction between the impacts of macroeconomic policy and of stock market factors on systemic risk. Using a unique monthly dataset of China's A-share listed firms from January 2000 to December 2015, we provide a new methodology by developing the Bayes estimating approach of Cosemans et al. (2016). We include two indicators, the M2 growth rate to capture monetary policy and the growth rate of state-owned fixed assets to capture fiscal policy, in a dynamic model for estimating the hybrid β (the systemic risk factor). The results demonstrate that both easy monetary policy and easy fiscal policy can significantly decrease systemic risk. In our model, the intercept term α is near zero and the coefficient of the hybrid β is significantly positive, consistent with the classical asset pricing theory. Not including macroeconomic policy factors in a pricing model would lead to both a significantly positive α and a lower coefficient of the hybrid β. We document that systemic risk is well explained by excessive returns after eliminating the measurement error of β in China.
We further illustrate how to detect structural turning points in the time-varying risk price and time-varying β by expanding the method of Chen & Hong (2012) and Chen & Huang (2018). Knowing when turning-points occur can help in timing government interventions to address systemic risk. When either the risk price rises abruptly and systemic risk drops swiftly or the reverse happens, the government should intervene in the stock market. When the risk price rises abruptly together with systemic risk, the government should not intervene because the rise in systemic risk implies that the economic climate is improving.
We make three contributions. First, we take both the time-varying risk price and the time-varying β (systematic risk) into account and identify the crucial roles of monetary policy and fiscal policy on systemic risk. Ignoring the impacts of macroeconomic policies on systemic risk would lead one to underestimate systemic risk and result in the ineffectiveness of β in explaining the excessive returns of individual stocks. Second, we propose a unique integrated-hybrid β, which is estimated by integrating macroeconomic policy factors with firms' characteristics factors, and demonstrate its advantages in explanatory power and out-sample tests in comparison with the existing mainstream models (e.g., Fama-Macbeth model, Fama-French three-factor model, Carhart four-factor model, Fama-French five-factor model). Third, we demonstrate a method for detecting structural changes in the time-varying hybrid βs and the time-varying risk prices simultaneously. We find two major structural-change points for time-varying risk prices in February 2012 and September 2014 and two major structural-change points for time-varying βs in August 2012 and December 2014. A series of robustness tests support our conclusions.
Our findings help to explain certain policy effects. First, the abovementioned turning-points are related to economic policy uncertainty and economic strategy adjustments in China. The decline in economic policy uncertainty after the 18th National Congress of the Communist Party of China in 2012 led to increases in systemic risk and risk prices in the stock market. China's economic strategy adjustment under new normal relates to the declines in systemic risk and risk prices in the stock market in 2014. Second, we examine the necessity for and effectiveness of intervention in the stock market. Third, we show that both easy fiscal policy and expansionary monetary policy can efficiently depress systemic risk in the stock market, illustrating that the duty for systemic risk control lies not only with the China Securities Regulatory Commission, but also with the Ministry of Finance and the People's Bank of China.
Keywords： Integrated Hybrid Betas; CAPM; Macro-economic Policy; Structural Changes

Summary： Limited stock market participation is a key issue in household finances. Although standard theory predicts universal participation, empirical investigations find that many households do not participate in the stock market and so do not earn equity premiums. The literature uses fixed participation costs, nonstandard preferences, beliefs and a lack of trust to explain this issue. However, these attributes can only explain a part of the wide dispersion in participation rates. Because the stock market is an important investment tool for households to increase their wealth, promoting stock market participation benefits China's real economy. Hence, limited stock market participation is an important topic from both academic and practical perspectives.
This study examines an important but unappreciated determinant of stock market participation: early-life experiences. A large literature in finance shows that personal life experiences influence people's risk-taking behavior both in the laboratory and in the field. Yet, the long-run effect of early-life experiences on stock market participation behavior has been ignored to date.
In this paper, we focus on the impact of early-life experiences on stock market participation. China, with its large rural-urban disparity, provides an ideal research setting for two reasons. First, being exposed to a rural environment for a long time at a young age is a randomly assigned characteristic due to the strict migration restrictions that existed for several decades. Whether one is exposed to rural areas is determined by where one is born, which cannot be altered. Second, unlike in most developed countries, there are huge socioeconomic differences in both the immediate setting and the social systems of rural and urban areas. In this dual system, living in rural areas implies a totally different ecology for children compared with those living in urban areas. This salient disparity makes it a credible identification of childhood exposure. Third, concerns over selection bias can be addressed in this setting because rural residents are much less educated than urban residents with rural experiences during childhood.
This paper examines whether childhood rural experiences affect the stock market participation of urban residents using individual-level data in China. Using CFPS data, we identify rural experiences by Hukou Registration Type in childhood.
In our empirical test, we find that rural experiences deter stock market participation. The economic magnitude of the effect is quite large; individuals with rural experience are 54% less likely to participate in the stock market, which is equivalent to a 44% decrease in the unconditional probability of participation (122%). The finding holds true even after we control for personal differences in trust, social interactions, risk attitudes, financial literacy, early-life socioeconomic status and a large set of household demographic and economic characteristics. Providing further evidence, the relation between rural experiences and stock market participation does not weaken with wealth. This implies that early-life experiences explain why even the rich stay away from the stock market even though they can afford the fixed participation cost.
Building on these findings, we further investigate what can mitigate the adverse effect of rural experiences on stock market participation. Inspired by the literature on personality traits, we hypothesize that the influence of openness affects the relation between rural experiences and stock market participation. We find that a higher level of openness significantly mitigates the rural experience effect. In fact, we find that rural childhood exposure does not have an impact on stock market participation among people with high levels of openness. These findings are consistent with the predictions of psychology.
Our study's main contribution is to consider early-life experiences as underlying determinants of stock market participation. To the best of our knowledge, the relation between early-life experiences and stock market participation has not been well addressed by the literature, especially in China's setting. We show that people's decisions to hold stocks are related to their rural experiences. Moreover, our findings provide new evidence for the long-run effect of childhood experiences on individual economic decisions.
Keywords： Stock Market Participation; Household Finance; Rural Experience

Summary： Financial frictions and a “dual” economic structure are two important characteristics of China's economy. There are many state-owned enterprises, which differ from private enterprises in their credit constraints, industry distribution, capital intensity and productivity. Since the financial crisis in 2008, the fiscal policy of expanding government expenditure has been an important regulatory tool for steady growth and structural adjustment, resulting in total government expenditure reaching 187841 billion RMB yuan in 2016. How does such a large increase in government expenditure change the economy? What is the difference between the effects of expansionary government expenditure on state-owned enterprises and on non-state-owned enterprises? How do financial frictions and enterprise heterogeneity influence the effect of fiscal policy? Is there any difference between the effects and long-term multipliers of government consumption expenditure and investment expenditure?
To answer these questions, this paper incorporates financial frictions and enterprise heterogeneity into a two-sector DSGE model to study the differences between the effects of government consumption expenditure and investment expenditure on state-owned and non-state-owned enterprises. The multipliers of government investment expenditure and consumption expenditure are estimated in equilibrium. Using both numerical simulations and mathematical derivations, this paper analyzes how financial frictions and enterprise heterogeneity influence the government expenditure multipliers.
The results show that the long-term multipliers of government investment expenditure are larger than that of consumption expenditures. For both types of government expenditures, the multiplier effects for the state-owned economy are larger than those for the non-state-owned economy. Government consumption expenditure influences the economy from the demand side because the demand resulting from government consumption expenditure is mainly for products produced by state-owned enterprises. This causes production factors to flow from the private to the state-owned sector, stimulating the state-owned economy and restraining the non-state-owned economy. Government investment expenditure affects the economy from the supply side and can promote both the state-owned and non-state-owned economies, though the impact on the state-owned economy is larger and more durable. Financial frictions and enterprise heterogeneity have negative effects on the long-term government expenditure multipliers. Financial frictions influence the multipliers through a private investment channel; the greater the financial frictions are, the stronger the crowding-out effect on private investment will be. Enterprise heterogeneity affects the multipliers by affecting the allocation of production factors between the two sectors.
This paper contributes to the literature in the following ways. First, it analyzes the differences in the effects and long-term multipliers of government consumption and investment expenditures. Second, the paper incorporates financial frictions into a two-sector DSGE model and uses numerical simulations and mathematical derivations to analyze the influencing mechanism of financial frictions on long-term government expenditure multipliers. Third, to model China's dual economic structure, this paper constructs a two-sector DSGE model in which the production sectors are separated into a state-owned and a non-state-owned production sector. Using this model, this paper investigates the different effects of government consumption and investment expenditures on the state-owned and non-state-owned economy, studies the effect of enterprise heterogeneity on the long-term government expenditure multipliers by means of numerical simulations and estimates different multipliers. Finally, the results provide new empirical evidence for the effects of government expenditure on the structure of the economy.
Keywords： Enterprise Heterogeneity; Financial Friction; Government Expenditure Multiplier; DSGE Model

Summary： The relationship between the tax-benefits (tax-public transfers) system and the distribution of income has long been a focus of scholarly work. The research in this field is underpinned by a belief that the government plays a key role in the level of economic inequality and poverty in a society. This leads to the following questions. What are the effects of taxes and public transfers on income redistribution? How effective are anti-poverty public transfers? The reduction in income inequality caused by tax-benefits systems is called the redistributive effect and is equal to the difference between income inequality before taxes and benefits (or pre-fiscal income inequality) and income inequality after taxes and benefits (or post-fiscal income inequality).
Different taxes and public transfer instruments have different consequences for the vertical equity and horizontal inequity of the overall tax and benefit systems. There are two kinds of benefits: means-tested social benefits, which are designed to help the poorest individuals and households, and non-means-tested social benefits, which are dispensed irrespective of the recipient's personal or household income. We expect that the contribution of means-tested social benefits to vertical equity is larger than the contribution of non-means-tested social benefits, while the latter will contribute more to horizontal inequity.
Using data from the China Health and Retirement Longitudinal Study (CHARLS) for 2013, this paper analyzes the impact of taxes and public transfers on income redistribution. The analysis reveals that when pensions are considered public transfers, both urban and rural income inequality decrease significantly more than when pensions are considered market income. Both pre- and post-fiscal income inequality are higher in rural areas than in urban areas. When pensions are considered market income, the minimum livelihood guarantee scheme for people who have lower per capita income than the local minimum living standard (known as dibao) was the largest contributor to the redistributive effect. However, when pensions are considered public transfers, pensions are the largest contributor. More than 90% of the redistributive effect is achieved by public transfers while no more than 10% of the effect results from personal income tax and social security contributions.
dibao, subsidies for low-income, blind, disabled, elderly and young persons who have no means to support themselves (known as wubaohu) and subsidies for especially poor households are better targeted at helping poor households, reduce poverty more efficiently and have fewer spillover effects. Of course, we should note that in terms of alleviating poverty effects, public transfers aimed at the poor are not desirable. This may be due to the leakage of such public transfers. In other words, non-poor households receive public transfers. As a result, public transfers cannot support the truly poor households effectively. A quota allocation for public transfers prevents the dynamic monitoring of poverty entry and exit, affecting the efficiency of anti-poverty public transfers. In an analysis of a sensitivity scenario in which contributory pensions are considered public transfers, we find that pensions have the largest spillover effects.
The important policy implications can be summarized as follows. To enhance the effects of personal income tax policies on income distribution, it is necessary to adjust the tax base, deductions and other elements of the taxation system to make personal income taxes more progressive. Public transfers for poor people such as dibao and wubaohu should be maintained. Well-targeted transfers to poor households and individuals should be established, meeting the optimization criteria of high vertical expenditure efficiency, high poverty reduction efficiency and few spillover effects; The optimal pension plan should eliminate inequalities between classes and match the pension system with its established purpose.
Our contributions can be summarized as follows. First, we analyze taxes and public transfers as a whole system from a micro perspective. Second, we use a series of decompositions of the redistribution effect to estimate the contributions of personal income taxes, which contain social security contribution and transfers instruments, to the vertical, re-ranking and redistributive effects. Finally, we calculate the effects of different kinds of public transfers on anti-poverty indices such as vertical expenditure efficiency, poverty reduction efficiency, spillover effects and poverty gap efficiency.
Keywords： Tax-transfers System; Redistributive Effect; Decompose; Poverty

Summary： Over four decades of reform and opening up, the Chinese economy has witnessed extraordinary economic growth with rising income inequality. This phenomenon has triggered a heated academic debate on the relationship between globalization and income inequality. The current consensus is that globalization has been one of the most important drivers of economic growth in China, but diverse views remain on the impact of globalization on income inequality and the transmission mechanisms. Foreign direct investment (FDI) has been an important impetus in accelerating capital accumulation, technology upgrade and market expansion in China as globalization advances. Current research on the impact of FDI on income inequality centers on the debate and validation of the Stolper-Samuelson theorem, which shows how globalization prompts changes in factor prices, leading to changes in income inequality. Other studies investigate how FDI influences local government behavior and how different behaviors by local government lead to income inequality. Few studies unite these arguments and explore more deeply the indirect channels through which FDI affects income inequality.
By analyzing the behavior of local governments, our paper explores the impact of globalization on income inequality and its transmission mechanism in China. We hypothesize that in addition to the direct impact of FDI on income inequality, local governments lower labor and environmental standards to compete for more FDI. Thus, local enterprises distort or incompletely comply with labor and environmental policies issued by the central government, which leads to the rise in income inequality.
We test our hypothesis empirically using a panel data set covering 31 provinces in China from 2004 to 2014. Because FDI is concentrated in urban areas, we measure income inequality as the ratio and the logarithm of the gap in per capita disposable income between the top and the lowest income quintiles in urban China. Labor standards are captured by the acceptance of labor dispute cases corresponding to per unit of industrial value-added and the fraction of identified work-related injuries in total employment. The pollution emission per unit of industrial value-added and the emission treatment rate are used as proxies for environmental standards. Because of possible endogeneity caused by reverse causality and omitted variable problems, we use instrument variables and apply the IV-GMM estimation strategy. We find that in the context of globalization in China, FDI entry contributes positively to income inequality, with almost half of the total impact realized indirectly through the channels of labor and environmental standards. Further decomposition of the contribution by labor standards and environmental standards shows that the average contributions are 5% and 40%, respectively. We also conduct robustness checks using different measures of labor and environmental standards, using different subsamples and introducing interaction terms, with no qualitative change in results.
The new mechanism and new evidence revealed in our paper enrich the literature on globalization and income inequality. We offer new policy alternatives for the launch of new development concepts of opening, sharing and green development. These results are important for the implementation of the Belt and Road Initiative and for considering policies for income redistribution. FDI has contributed greatly to China's economic growth. Despite the negative shock of globalization on income inequality, it is unwise to turn against FDI or repudiate the opening policy completely. Special attention should be paid to the behavior of local governments in conforming to labor and environmental standards. To alleviate the negative impact of FDI on the income distribution, it is important for local governments to strengthen regulations on labor and environmental standards.
Keywords： FDI; Local Government Behavior; Labor Standards; Environmental Standards; Income Inequality

Summary： The 2008 international financial crisis caused tremendous damage to the world economy, however no one can accurately measure the extent of the damage. This has led to questions for economists and modern economics, making it particularly important to examine the theoretical framework of modern economics, find the drawbacks of the mainstream economic system and explore ways to improve economic theory and escape the current predicament of economics.
This study reveals the inherent contradictions in the mainstream economic system, and the limitations of its individualistic methodology through a comparative analysis of the theoretical frameworks and methodologies of classical economics, neoclassical economics, Austrian economics and emerging classical economics, to open the way for a reconstruction of the economic theory. After a brief investigation of the historical development of economics, this paper finds that the individualistic methodology often used in economics has major flaws. It is impossible to establish a complete theoretical system that relies solely on the individualistic methodology. Mainstream economics has problems separating static from dynamic, total from structural, micro from macro and growth from distribution analysis. Creating a new economic theoretical system is an important task facing economists.
Following the path paved by pioneers Adam Smith, Young and Yang Xiaokai, and inspired by the Chinese classic Tao Te Ching and materialist dialectics, this paper regards the whole or the group as a new entity formed after a quantitative change leads to a qualitative change. The nature of the group is completely different from the individuals that make it up. This paper introduces a group behavior hypothesis based on individual behavior, combines individualistic and holistic methodology, develops a research paradigm for new classical economics and establishes a research framework that integrates development with structure, growth and distribution.
This paper obtains results beyond those of neoclassical economics. It proves that markets have limitations. Both self-sufficiency and the market structure of the division of labor are affected by transaction costs, individual preferences and the production technology and are the results of the endogenous evolution of the economic system. The market economy is inherently unstable and unfair. When there are few participants and an odd number of market participants, the market economy is unlikely to produce a fair income distribution. This paper gives a formula for the division of labor and the distribution of income and derives the evolutionary equation for price expectations. This formal expression of Smith's “invisible hand” deepens our understanding of the views of Adam Smith on price fluctuations and those of Stiglitz on how the invisible hand “trembles”.
This paper has three main contributions. First, it examines the problems and contradictions inherent to neoclassical economics and the Austrian school of economics from the perspectives of philosophy, logic and mathematics, uncovering the drawbacks of the individualistic methodology. It is concluded that holism and individualism are complementary. Second, inspired by the dialectical thinking of the Tao Te Ching, this paper proposes a modeling idea that conforms to the laws of the unity and conflict of opposites, the passage of quantitative changes into qualitative changes and the negation of the negation, integrating the individual behavior hypothesis and the group behavior hypothesis into a new analytical framework to achieve unity of individualism with holism and deductive reasoning with inductive reasoning. Third, it is proven that the new framework has more explanatory power than neoclassical economics, and that market structure, growth and distribution can be discussed within the same theoretical framework.
Keywords： Division of Labor; Market Structure; Income Distribution; Price Evolution

Summary： This paper investigates the expansion of internet applications resulting from the integration of the Internet, big data and artificial intelligence, and the impact of these applications on consumption, investment, production, services, health and life. “Data and data dialogue” is the paradigm in which everything is deconstructed by large data or is dominated by artificial intelligence. “Data and data dialogue” is a choice or mode of operation wherein data thinking takes the place of causal thinking. It is difficult to explain the actual choices of people after the integration of the Internet, large data and artificial intelligence. This paper views the era of industrialization as a version of “human and information dialogue” and the current stage of development as a version of “people and data dialogue”. In the future, we will face “data and data dialogue”.
Based on these three versions of “dialogue”, this paper provides an explanation for human choice behavior suitable for the circumstances of the expansion of internet applications. Microeconomics is based on rational choice theory. However, both traditional and modern rational choice theory face difficulties in accurately explaining human choice behavior with their individualist methodology. This paper launches a new theoretical interpretation of choice preferences, cognitive processes and utility expectations for the Internet application expansion period.
Inspired by the expansion of internet applications and the burgeoning “data and data dialogue”, this paper posits that the theory of rational choice can assume complete information as a hypothesis. This paper uses the methodology of the group doctrine to replace the individualist methodology. This amounts to an innovation in rational choice theory and provides an analytical framework for reshaping the basic theory of microeconomics. The basic analytical approach built in this paper is developed from “human and information dialogue” to “human and data dialogue” to “data and data dialogue”. To help in the exploration of the problem, the framework of this paper outlines the scaffolding of the behavior of human economic choices in the age of big data and the internet. Going deep into this framework, we enlarge the analysis space of the basic theory of economics.
There has been considerable integration of big data, the internet and artificial intelligence in economic operations. The impact of Internet resource allocation mechanisms on the basic theory of microeconomics is revolutionary. This paper holds that in the era of “data and data dialogue”, the role of the internet resource allocation mechanism in economic operations will be more important than the market resource allocation mechanism was in the period of “human and information dialogue”. This requires economists to build a new resource allocation theory to reflect the expansion of Internet applications and to construct a new theory of industrial organization. This paper puts forward theoretical assumptions about how to construct a new theory of resource allocation and a new industrial organization theory, which are analytical innovations of the theory of resource allocation in economics and the theory of industrial organization. These assumptions are the extension of the rough frame of this article and are analytical innovations.
The logic of this paper is based on the analysis of the “data and data dialogue” of the future. The analysis is based on the division of the two main behavioral subjects: the intelligent brain and the non-intelligent brain. This paper builds a theory of resource allocation and a theory of industrial organization using this new analysis hypothesis, reference system and analysis method by remolding rational choice theory. The intelligent brain will become the dominator of human choice as “data and data dialogue” becomes prominent. Economists are not intelligent brains but can reinvent the economics world with the help of intelligent brains.
Keywords： Internet; Big Data; Artificial Intelligence; Data and Data Dialogue; Microeconomics