IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v81y2018icp88-115.html
   My bibliography  Save this article

Transition and capital misallocation: the Chinese case

Author

Listed:
  • Cubizol, Damien

Abstract

This paper demonstrates that the allocation of household savings to State-Owned Enterprises (SOEs) in China, and not to the increasing share of private firms, explains a part of the drop in the consumption share and of the patterns of capital flows during China’s transition. The contribution is to explain these two elements in a dynamic general equilibrium model with TFP growth that differentiates FDI and foreign assets. In addition to other frictions, financial intermediation and SOEs have the crucial role by misdirecting household savings. It modifies firms’ labor and capital intensiveness, and creates shifts in savings accumulation and capital flows. Moreover, the increasing share of credit-constrained private firms hinders wage growth, and returns on household savings are low to finance SOEs; these two elements reduce the consumption share. With a calibration adapted to the Chinese economy and deterministic shocks, the model also matches to a large extent the data for a variety of stylized facts during China’s transition.

Suggested Citation

  • Cubizol, Damien, 2018. "Transition and capital misallocation: the Chinese case," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 88-115.
  • Handle: RePEc:eee:jimfin:v:81:y:2018:i:c:p:88-115
    DOI: 10.1016/j.jimonfin.2017.08.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S026156061730164X
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jimonfin.2017.08.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:bof:bofitp:urn:nbn:fi:bof-201503181118 is not listed on IDEAS
    2. Boyreau-Debray, Genevieve & Wei, Shang-Jin, 2004. "Pitfalls of a State-Dominated Financial System: The Case of China," CEPR Discussion Papers 4471, C.E.P.R. Discussion Papers.
    3. Randall Morck & Bernard Yeung & Minyuan Zhao, 2008. "Perspectives on China's outward foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(3), pages 337-350, April.
    4. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," IMF Working Papers 2007/009, International Monetary Fund.
    5. Alberto Martin & Jaume Ventura, 2015. "Financial Reforms and Capital Flows: Insights from General Equilibrium," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo J. Caballero & Klaus Schmidt-Hebbel (ed.),Economic Policies in Emerging-Market Economies Festschrift in Honor of Vittorio Corbo, edition 1, volume 21, chapter 7, pages 109-137, Central Bank of Chile.
    6. Franco Modigliani & Shi Larry Cao, 2004. "The Chinese Saving Puzzle and the Life-Cycle Hypothesis," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 145-170, March.
    7. Martin, Alberto & Taddei, Filippo, 2013. "International capital flows and credit market imperfections: A tale of two frictions," Journal of International Economics, Elsevier, vol. 89(2), pages 441-452.
    8. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
    9. Ge, Suqin & Yang, Dennis Tao, 2011. "Labor market developments in China: A neoclassical view," China Economic Review, Elsevier, vol. 22(4), pages 611-625.
    10. Poncet, Sandra & Steingress, Walter & Vandenbussche, Hylke, 2010. "Financial constraints in China: Firm-level evidence," China Economic Review, Elsevier, vol. 21(3), pages 411-422, September.
    11. Nicolas Coeurdacier & Stéphane Guibaud & Keyu Jin, 2015. "Credit Constraints and Growth in a Global Economy," American Economic Review, American Economic Association, vol. 105(9), pages 2838-2881, September.
    12. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    13. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
    14. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
    15. Chadwick C. Curtis & Steven Lugauer & Nelson C. Mark, 2015. "Demographic Patterns and Household Saving in China," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 58-94, April.
    16. Laura Alfaro & Sebnem Kalemli-Ozcan & Vadym Volosovych, 2014. "Sovereigns, Upstream Capital Flows, And Global Imbalances," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1240-1284, October.
    17. Jiandong Ju & Shang-Jin Wei, 2010. "Domestic Institutions and the Bypass Effect of Financial Globalization," American Economic Journal: Economic Policy, American Economic Association, vol. 2(4), pages 173-204, November.
    18. Tamim Bayoumi & Hui Tong & Shang-Jin Wei, 2012. "The Chinese Corporate Savings Puzzle: A Firm-level Cross-Country Perspective," NBER Chapters, in: Capitalizing China, pages 283-308, National Bureau of Economic Research, Inc.
    19. Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
    20. Jun Du & Sourafel Girma, 2007. "Finance and Firm Export in China," Kyklos, Wiley Blackwell, vol. 60(1), pages 37-54, February.
    21. Arvind Subramanian, 2010. "New PPP-Based Estimates of Renminbi Undervaluation and Policy Implications," Policy Briefs PB10-8, Peterson Institute for International Economics.
    22. Forbes, Kristin J., 2010. "Why do foreigners invest in the United States?," Journal of International Economics, Elsevier, vol. 80(1), pages 3-21, January.
    23. Laura Alfaro & Sebnem Kalemli‐Ozcan & Selin Sayek, 2009. "FDI, Productivity and Financial Development," The World Economy, Wiley Blackwell, vol. 32(1), pages 111-135, January.
    24. Bénassy-Quéré, Agnès & Carton, Benjamin & Gauvin, Ludovic, 2013. "China and global rebalancing: A two-country approach," China Economic Review, Elsevier, vol. 26(C), pages 118-139.
    25. Shang-Jin Wei & Xiaobo Zhang, 2011. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 511-564.
    26. Keyu Jin, 2012. "Industrial Structure and Capital Flows," American Economic Review, American Economic Association, vol. 102(5), pages 2111-2146, August.
    27. Chamon, Marcos & Liu, Kai & Prasad, Eswar, 2013. "Income uncertainty and household savings in China," Journal of Development Economics, Elsevier, vol. 105(C), pages 164-177.
    28. Perotti, Enrico C., 1993. "Bank lending in transition economies," Journal of Banking & Finance, Elsevier, vol. 17(5), pages 1021-1032, September.
    29. Megginson, William L., 2005. "The economics of bank privatization," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 1931-1980, August.
    30. Michael Funke & Petar Mihaylovski & Haibin Zhu, "undated". "Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control," GRU Working Paper Series GRU_2016_007, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    31. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    32. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    33. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    34. Bénassy-Quéré, Agnès & Carton, Benjamin & Gauvin, Ludovic, 2013. "China and global rebalancing: A two-country approach," China Economic Review, Elsevier, vol. 26(C), pages 118-139.
    35. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2), pages 61-102.
    36. Nicholas Borst & Nicholas Lardy, 2015. "Maintaining Financial Stability in the People's Republic of China during Financial Liberalization," Working Paper Series WP15-4, Peterson Institute for International Economics.
    37. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
    38. Gian M Milesi-Ferretti & Olivier J Blanchard, 2009. "Global Imbalances; In Midstream?," IMF Staff Position Notes 2009/29, International Monetary Fund.
    39. Coudert, Virginie & Couharde, Cecile, 2007. "Real equilibrium exchange rate in China is the renminbi undervalued?," Journal of Asian Economics, Elsevier, vol. 18(4), pages 568-594, August.
    40. Tong Li, 2014. "Shadow banking in China: expanding scale, evolving structure," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 6(3), pages 198-211, July.
    41. Keyu Jin & Nicolas Coeurdacier, 2013. "The One-Child Policy and Household Savings in China," 2013 Meeting Papers 790, Society for Economic Dynamics.
    42. Brandt, Loren & Zhu, Xiaodong, 2010. "Accounting for China's Growth," IZA Discussion Papers 4764, Institute of Labor Economics (IZA).
    43. Démurger, Sylvie & Li, Shi & Yang, Juan, 2012. "Earnings differentials between the public and private sectors in China: Exploring changes for urban local residents in the 2000s," China Economic Review, Elsevier, vol. 23(1), pages 138-153.
    44. Héricourt, Jérôme & Poncet, Sandra, 2009. "FDI and credit constraints: Firm-level evidence from China," Economic Systems, Elsevier, vol. 33(1), pages 1-21, March.
    45. Benhima, Kenza, 2013. "Financial integration, capital misallocation and global imbalances," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 324-340.
    46. Choukhmane, Taha & Coeurdacier, Nicolas & Jin, Keyu, 2013. "The One-Child Policy and Household Savings," CEPR Discussion Papers 9688, C.E.P.R. Discussion Papers.
    47. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, vol. 61(1), pages 73-100, October.
    48. Xuejin Zuo & Feng Wang, 1999. "Inside China's Cities: Institutional Barriers and Opportunities for Urban Migrants," American Economic Review, American Economic Association, vol. 89(2), pages 276-280, May.
    49. Morris Goldstein & Nicholas Lardy, 2006. "China's Exchange Rate Policy Dilemma," American Economic Review, American Economic Association, vol. 96(2), pages 422-426, May.
    50. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
    51. Bussière, Matthieu & Kalantzis, Yannick & Lafarguette, Romain & Sicular, Terry, 2013. "Understanding household savings in China: the role of the housing market and borrowing constraints," MPRA Paper 44611, University Library of Munich, Germany.
    52. Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "Financial Integration, Financial Development, and Global Imbalances," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 371-416, June.
    53. Boyreau-Debray, Genevieve, 2003. "Financial intermediation and growth - Chinese style," Policy Research Working Paper Series 3027, The World Bank.
    54. BAI, Chong-En & QIAN, Zhenjie, 2010. "The factor income distribution in China: 1978-2007," China Economic Review, Elsevier, vol. 21(4), pages 650-670, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hao, Yu & Gai, Zhiqiang & Wu, Haitao, 2020. "How do resource misallocation and government corruption affect green total factor energy efficiency? Evidence from China," Energy Policy, Elsevier, vol. 143(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Damien Cubizol, 2017. "Transition and capital misallocation: the Chinese case," Working Papers halshs-01176919, HAL.
    2. Cubizol, Damien, 2020. "Rebalancing in China: A taxation approach," China Economic Review, Elsevier, vol. 60(C).
    3. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 585-645, Elsevier.
    4. Damien Cubizol, 2017. "Rebalancing in China: a taxation approach," Working Papers 1732, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    5. Nicolas Coeurdacier & Stéphane Guibaud & Keyu Jin, 2015. "Credit Constraints and Growth in a Global Economy," American Economic Review, American Economic Association, vol. 105(9), pages 2838-2881, September.
    6. Josef Schroth, 2016. "Capital Flows to Developing Countries: Is There an Allocation Puzzle?," Staff Working Papers 16-53, Bank of Canada.
    7. Yao, Yang, 2014. "The Chinese Growth Miracle," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 7, pages 943-1031, Elsevier.
    8. İmrohoroğlu, Ayşe & Zhao, Kai, 2018. "The chinese saving rate: Long-term care risks, family insurance, and demographics," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 33-52.
    9. Samuel Cudré & Mathias Hoffmann, 2017. "A provincial view of global imbalances: regional capital flows in China," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(3), pages 573-599, August.
    10. Barany, Zsofia & Coeurdacier, Nicolas & Guibaud, Stéphane, 2018. "Capital Flows in an Aging World," CEPR Discussion Papers 13180, C.E.P.R. Discussion Papers.
    11. Mika Nieminen, 2017. "Patterns of international capital flows and their implications for developing countries," WIDER Working Paper Series wp-2017-171, World Institute for Development Economic Research (UNU-WIDER).
    12. Cheng, Gong, 2015. "A Growth Perspective On Foreign Reserve Accumulation," Macroeconomic Dynamics, Cambridge University Press, vol. 19(6), pages 1358-1379, September.
    13. Curtis, Chadwick C. & Lugauer, Steven & Mark, Nelson C., 2017. "Demographics and aggregate household saving in Japan, China, and India," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 175-191.
    14. Cozzi, Guido & Davenport, Margaret, 2017. "Extrapolative expectations and capital flows during convergence," Journal of International Economics, Elsevier, vol. 108(C), pages 169-190.
    15. Mika Nieminen, 2017. "Patterns of international capital flows and their implications for developing countries," WIDER Working Paper Series 171, World Institute for Development Economic Research (UNU-WIDER).
    16. Jingting Fan & Sebnem Kalemli-Ozcan, 2016. "Emergence of Asia: Reforms, Corporate Savings, and Global Imbalances," NBER Working Papers 22334, National Bureau of Economic Research, Inc.
    17. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
    18. Chang, Xiao & An, Tongliang & Tam, Pui Sun & Gu, Xinhua, 2020. "National savings rate and sectoral income distribution: An empirical look at China," China Economic Review, Elsevier, vol. 61(C).
    19. Choukhmane, Taha & Coeurdacier, Nicolas & Jin, Keyu, 2013. "The One-Child Policy and Household Savings," CEPR Discussion Papers 9688, C.E.P.R. Discussion Papers.
    20. Steven Lugauer & Jinlan Ni & Zhichao Yin, 2014. "Micro-Data Evidence on Family Size and Chinese Saving Rates," Working Papers 023, University of Notre Dame, Department of Economics, revised Jun 2014.

    More about this item

    Keywords

    China’s transition; Foreign assets; FDI; Consumption; Global imbalances; Factor market distortions;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
    • P30 - Economic Systems - - Socialist Institutions and Their Transitions - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:81:y:2018:i:c:p:88-115. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.