Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.http://deepblue.lib.umich.edu/bitstream/2027.42/39654/3/wp270.pd

Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.

Joint Liability Lending and the Rise and Fall of China's Township and Village Enterprises

Using data from a recent survey of bank and enterprise managers and government officials in southern China, we present a new explanation for the rise and fall of collectively-owned township and village enterprises (TVEs) based on the willingness of banks to finance collective enterprise development. Until recently bank loans to TVEs exhibited the key features of joint liability lending, supported by the unique sanctioning ability of local leaders. Beginning in the mid 1990s, liquidation costs fell, firm performance deteriorated, real interest rates rose, and financial competition increased. These changes led to a dramatic change in the lending preferences of banks in favor of private firms. Empirical estimates of the determinants of bank lending preferences, the involvement of township leaders in lending, and the ability of firms to obtain loans support our explanation.http://deepblue.lib.umich.edu/bitstream/2027.42/39846/3/wp462.pd

A Refinancing Model of Decentralization with Empirical Evidence from China

Decentralization can complement market liberalization by strengthening incentives of agents to exploit local information in response to market signals. In China, however, banks centralized lending authority following financial reforms in the mid-1990s. We offer a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that the inability of financial systems to exploit local information in weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.http://deepblue.lib.umich.edu/bitstream/2027.42/39845/3/wp461.pd

Joint Liability Lending and the Rise and Fall of China's Township and Village Enterprises

Using data from a recent survey of bank and enterprise managers and government officials in southern China, we present a new explanation for the rise and fall of collectively-owned township and village enterprises (TVEs) based on the willingness of banks to finance collective enterprise development. Until recently bank loans to TVEs exhibited the key features of joint liability lending, supported by the unique sanctioning ability of local leaders. Beginning in the mid 1990s, liquidation costs fell, firm performance deteriorated, real interest rates rose, and financial competition increased. These changes led to a dramatic change in the lending preferences of banks in favor of private firms. Empirical estimates of the determinants of bank lending preferences, the involvement of township leaders in lending, and the ability of firms to obtain loans support our explanation.joint liability, banking, China, privatization, collective

How has Economic Restructuring Affected China’s Urban Workers?*

Using data from the China Urban Labor Survey conducted in five large Chinese cities at year end 2001, we quantify the nature and magnitude of shocks to employment and worker benefits during the period of economic structuring from 1996 to 2001, and evaluate the extent to which adversely affected urban workers had access to public and private assistance. Employment shocks were large and widespread, and were particularly hard on older workers and women. Unemployment reached double digits in all sample cities and labor force participation declined by 8 percent. Urban residents faced modest levels of wage and pension arrears, and sharp declines in health benefits. Public assistance programs for dislocated workers had limited coverage, with most job-leavers relying upon private assistance to support consumption, mainly from other household members.labor, unemployment, China, restructuring

Explaining Rising Returns to Education in Urban China in the 1990s

Although theory predicts that international trade will decrease the relative demand for skilled workers in relatively skill-deficit countries, in recent decades many developing countries have experienced rising wage premiums for skilled workers. We examines this puzzle by quantifying the relative importance of different supply and demand factors in explaining the rapid increase in the returns to education experienced by China during the 1990s. Analyzing Chinese urban household survey and census data for six provinces, we find that although changes in the structure of demand did reduce the demand for skilled workers, consistent with trade theory, the magnitude of the effect was modest and more than offset by institutional reforms and technological changes that increased the relative demand for skill.education, earnings, inequality, China

Cognitive Skills, Non-Cognitive Skills, and the Employment and Wages of Young Adults in Rural China

The objective of this paper is to examine whether noncognitive skills explain differences in employment status and hourly wages even after controlling for age, experience, schooling and cognitive skills. Of particular interest is to examine the relative magnitudes of the impacts of the cognitive and noncognitive skills on these labor market outcomes. Data used in this paper come from the Gansu Survey of Children and Families (GSCF), which followed a random sample of 2,000 children in rural areas of Gansu Province who were 9-12 years old in the year 2000. Three waves of surveys were completed in 2000, 2004, and 2007-2009. The GSCF is the first large-scale data collection on child and adolescent cognitive and noncognitive skills in rural China.cognitive skills, noncognitive skills, years of schooling, wage, Gansu, China, International Development, Labor and Human Capital,

The great proletarian cultural revolution, disruptions to education, and returns to schooling in urban China

In determining whether a country's higher education system should be expanded, it is important for policymakers first to determine the extent to which high private returns to post-secondary education are an indication of the scarcity of graduates instead of the high unobserved ability of students who choose to attend post-secondary education. To this end, the paper identifies the returns to schooling in urban China using individual-level variation in educational attainment caused by exogenous city-wide disruptions to education during the Cultural Revolution from 1966 to 1976. For city-cohorts who experienced greater disruptions, children's educational attainment became less correlated with that of their fathers and more influenced by whether their fathers held administrative positions. The analysis calculates returns to college education using data from the China Urban Labor Survey conducted in five large cities in 2001. The results are consistent with the selection of high-ability students into higher education. The analysis also demonstrates that these results are unlikely to be driven by sample selection bias associated with migration, or by alternative pathways through which the Cultural Revolution could have affected adult productivity.Education For All,Tertiary Education,Secondary Education,Primary Education,Population Policies