China & World Economy

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 1671-2234

Issue Number

No. 31-6, November 2023

Latest documents

Guest Editors' Words
Media Inclination and Outward Foreign Direct Investment: Evidence from Chinese Firms
Media inclinations, whether favorable or biased, play a pivotal role in shaping public opinion. Sometimes, media coverage may unintentionally foster skepticism towards foreign firms, which could create challenges for those companies when they enter new markets. Based on a panel dataset from 2005 to 2020, this is one of the first studies to investigate empirically the impact of media opinion on outward foreign direct investment (OFDI) behaviors at the firm level. The media inclination index was constructed according to the varying inclinations of media from different countries in their reporting on each event. We examined the impact of media inclination on the investment value, frequency, and number of industries. This study has revealed the following insights: (i) Positive media coverage can stimulate the investment behavior of Chinese firms. (ii) The heterogeneity analysis indicates that the promotional effect of media reporting inclination on OFDI is more significant for state‐owned firms from the investor's perspective and especially pronounced for firms in developing countries from the investee's perspective. (iii) Diplomatic visits and scientific research cooperation can amplify the positive impact of media opinions on the OFDI behaviors of Chinese firms.
The Chinese Export Displacement Effect Revisited: The Case of the East African Community
China's increasing exports have prompted research to examine whether Chinese exports displace those that originate from elsewhere. In this paper we focus on the growth of China's exports to the East African Community (EAC) countries and show how they have affected exports from the European Union (EU). Our methodological contribution to the literature is a set of total and relative displacement estimates based on different specifications of the gravity model where we control for country–year fixed effects so as to avoid the error of not accounting for time‐varying “multilateral resistance.” Our empirical findings do not support the hypothesis that Chinese exports have displaced exports from other countries including those from the EU. These results suggest that competition in the EAC market has not been a zero‐sum game among different exporting countries.
Capital Account Liberalization and International Corporate Bond Issuance: Transaction‐level Evidence from China
This paper provides transaction‐level evidence about the impact of capital account liberalization on firms' bond issuance in the international financial market. Using bond issuance data for firms headquartered in China between 2014 and 2018, we showed that domestic private firms issued more bonds abroad than foreign‐invested enterprises after restrictions were largely relaxed, controlling for possible confounding shocks such as monetary policy, local credit market shocks, US interest rate, carry trade, and global uncertainty shocks measured by the Chicago Board Option Exchange's Volatility Index. We found that domestic firms did not increase the overall volume of bond issuance but just had a higher portion of international bond issuance. We also found that domestic firms with higher tangible asset ratios tended to issue more bonds abroad. Our results suggest that targeted liberalization policy could effectively stimulate firms to issue bonds abroad. Policymakers need to monitor closely firms that issue more bonds abroad and thus have greater exposure to global shocks, incorporate these financial risks into policy design, and safeguard financial stability more effectively.
Earnings Management of Chinese Listed Multinational Corporations
This study evaluates the quality of accounting information provided by Chinese multinational corporations (MNCs) in relation to the issue of earnings management. Using a combined dataset of outward foreign direct investment and financial statements by Chinese firms publicly listed on A‐share markets between 2012 and 2017, we investigate whether Chinese MNCs are more inclined to manage earnings. We discover that these firms exhibited significant earnings management behavior and typically adjusted their earnings downward. We demonstrate that these effects were more pronounced among private MNCs than state‐owned firms, and in host countries with weaker institutional quality. Further research reveals that after delaying the confirmation of current earnings, Chinese MNCs received higher government subsidies, and this pattern was particularly prevalent among private MNCs. We find no evidence that Chinese MNCs manipulated earnings to avoid paying taxes.
International Patent Cooperation, Patent Prosecution Highway Agreements, and Export Product Quality
This paper investigates how international cooperation for patent examination using Patent Prosecution Highway (PPH) agreements has affected the quality of firms' exports. Taking the PPH agreements signed between China and the export destinations as a quasi‐natural experiment, we established a difference‐in‐difference‐in‐differences model. We found that international cooperation for patent examination caused firms to increase export quality to PPH partners in patent‐intensive industries to a greater extent. This effect was more profound among PPH partners with stronger intellectual property protection, differentiated products and core products, and agreements along with the Patent Cooperation Treaty. We also found that PPH agreements increased the number of Chinese patent applications filed in PPH partners, patent applications by PPH partners in China, and the level of innovation, all of which constitute the major channels through which export quality to PPH partners increases. Our findings demonstrate that international patent cooperation has played an important role in promoting international trade quality.
Valuation Effects of US–China Trade Conflict: The Role of Institutional Investors
Employing an event study approach to the US–China trade conflict, we found that this conflict had an overall negative effect on the stock market performance of Chinese listed firms, but firms with institutional investor holdings (IIH) exhibited smaller losses than their counterparts in response to a US presidential memo announcing a trade conflict. We also examined the heterogeneous effects of this conflict on firms. The positive effect of IIH was larger for firms with foreign exposure and firms located in provinces with a higher degree of marketization. Institutional investor holdings helped to reduce firms' cost of refinancing and improved their long‐run performance given the same short‐term loss in response to the US presidential announcement during the trade conflict. These findings explain the role of institutional investors in alleviating the effects of the US–China trade conflict and achieving financial stability from a micro‐perspective. The results have policy implications for corporate governance and financial market stabilization in response to trade policy uncertainty.
Can Monetary Policy Undo Asset‐freezing Sanctions?
This article investigates the macroeconomic consequences of foreign asset‐freezing sanctions, a tool utilized by several Western nations amid recent geopolitical tensions. Specifically, it examines the repercussions of such sanctions on open economies, finding that they may experience a sharp recession and currency crisis. To quantify the impact, we develop a new Keynesian dynamic stochastic general equilibrium model with financial frictions and an asset‐freezing channel for an open economy. We also calibrate our model to capture the unique structures of the Russian economy. The quantitative analysis of the model demonstrates that an abrupt asset‐freezing sanction would lead to large output losses and high inflation increases. Our counterfactual examination reveals that higher elasticity of import substitution and lower elasticity of export substitution could alleviate the impact of foreign sanctions, whereas more aggressive monetary policy may have positive but limited stabilization effects. Notably, the monetary authority must navigate a trade‐off between stabilizing output and managing inflation resulting from the cash‐in‐advance channel.
The Role of Collateral in Sudden Stop Models
This paper examines the role of collateral in sudden stop models that feature occasionally binding constraints and endogenous growth. It shows how different assumptions regarding the nature and valuation of collateral alter the dynamics of crisis episodes and the welfare costs of pecuniary externalities. For example, in a model with land as collateral, valuing collateral at the “expected future price” leads to substantially weaker Fisherian deflation effects than the case with collateral valued at the “current price.” However, the average size of sudden stops in the two economies are similar because households endogenously avoid the region where large sudden stops would occur. The differences between different collateral valuations and the size of sudden stops are amplified when we abstract from endogenous growth. In another case, assuming collateral is income rather than land leads to smaller sudden stops as income is less volatile than asset prices. Finally, we show that some choices lead to constrained or conditionally efficient allocations whereas others generate inefficiencies, but these inefficiencies are small.
Increasing Wages, Factor Substitution, and Cropping Pattern Changes in China
This article analyzed the influence of increasing wages on cropping patterns from theoretical and empirical perspectives. The results showed that the increasing labor cost provided a significant incentive to adjust the grain cropping pattern, which increased the production of the three major cereal grains but reduced the production of other grain crops. Increasing wages had a significant negative impact on cash crops. More labor‐intensive cash crops experienced a larger negative impact in the context of increasing wages. The increase in labor costs also had a negative impact on the proportion of vegetables produced, which was more evident in northern China. A further mechanism test indicated that factor substitution was a significant reason for cropping pattern changes; this illustrated the substitution of labor by machinery not only between grain crops and cash crops but also among different cash crops.