SummaryLaw finance and economic growthin China.docx
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SummaryLaw finance and economic growthin China.docx
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SummaryLawfinanceandeconomicgrowthinChina
Mid-termreport
Summaryfor“Law,finance,andeconomicgrowthinChina”
a)Acoverletterofthepaper
Deareditor,
Wewouldliketosubmittheenclosedmanuscriptentitled"Law,finance,andeconomicgrowthinChina".Belowareourresponsestoyoursubmissionquestions.
1.Titleandthecentralthemeofthearticle
Papertitle:
“Law,finance,andeconomicgrowthinChina".ThispapercomparesChina’sformalsystemsoflawandfinanceandgoverningmechanismswithotherdevelopedandemergingcountries.AndtheyfindthatChinsisanimportantcounterexampletothefindingsinthelaw,institutions,finance,andgrowthliterature.Neitheritslegalnorfinancialsystemiswelldeveloped,yetithasoneofthefastestgrowingeconomies.AfterexaminingtheStated,ListedandPrivateSectors,theyfindthePrivateSectorgrowsmuchfasterthantheothersandprovidesmostoftheeconomy’sgrowth.Theimbalanceamongthethreesectorssuggeststhatalternativefinancingchannelsandgovernancemechanisms,suchasthosebasedonreputationandrelationships,supportthegrowthofthePrivateSector.
2.Thepartaddressedexcellent
Ibelievethatfouraspectsofthismanuscriptwillmakeitexcellent.First,thetitleisverycommon,butthecontentisnewtoreadersandresearchers.Second,thestructureframeworkiswonderfulandclear.Third,PanelDataapplieswellinthepaper.Final,theconclusionimpliesthatthereareimportantfactorsconnectinglaw,institutions,finance,andgrowthnotwellunderstood.AbetterunderstandingofhowthesenonstandardmechanismsworktopromotegrowthcanshedlightonoptimaldevelopmentpathsnotonlyforChina,butalsomanyothercountries.
3.Name,faxandemailaddressofthecorrespondingauthor
Authors:
FranklinAllen,JunQian,MeijunQian
Tel.:
+12158983629-fax:
+12155732207
E-mailaddress:
allenf@wharton.upenn.edu(F.Allen).
Finally,thispaperisoriginalunpublishedworkandithasnotbeensubmittedtoanyotherjournalforreviews.
Sincerelyyours,
b) Themainconclusion
Recentlyseveralrelatedliteratureonlaw,institutions,finance,andeconomicgrowthhaveemergedinfinancialeconomics.However,Chinaisdifferent.ThispapercomparesChina’sformalsystemsoflawandfinanceandthealternativeinstitutionalarrangementsandgoverningmechanismswithotherdevelopedandemergingcountries.AndtheauthorsexaminetherelationbetweenthedevelopmentofthesesystemsandChina’economicgrowth.
Withoneofthelargestandfastestgrowingeconomiesintheworld,Chinadiffersfrommostofthecountriesstudiedinthelaw,institutions,finance,andgrowthliterature,andisanimportantcounterexampletotheexistingfindings:
Itslegalandfinancialsystemsaswellasinstitutionsareallunderdeveloped,butitseconomyhasbeengrowingataveryfastrate.AfterexaminingthreesectorsoftheChineseeconomy,thelaw–finance–growthnexusestablishedbytheexistingliteratureworkswellfortheStateandListedsectors.Withpoorlegalprotectionofminorityandoutsideinvestors,(standard)externalmarketsareweak,andthegrowthofthesefirmsisslowornegative.However,thesize,growth,andimportanceofthesetwosectorsintheeconomyaredominatedbythoseofthePrivateSector.Inspiteofrelativelypoorerapplicablelegalprotectionandstandardfinancingchannels,thePrivateSectorhasbeengrowingmuchfasterthantheothersandhasbeencontributingtomostoftheeconomy’sgrowth.Thesystemofalternativemechanismsandinstitutions,suchasthosebasedonreputationandrelationships,playsanimportantroleinsupportingthegrowthinthePrivateSector,andtheyaregoodsubstitutesforstandardcorporategovernancemechanismsandfinancingchannels.
TheresultsonthedifferencesamongthethreesectorsinChinachallengetheviewsupportingthelaw–finance–growthnexus.Moreover,thesuccessofthePrivateSectorinChinaalsochallengestheviewthatpropertyrightsandthelackofgovernmentcorruptionarecrucialindeterminingfinancialandeconomicoutcomes.AlthoughtheresultsarebasedonChina,similar’substitutes’basedonreputationandrelationshipsmaybebehindthesuccessofothereconomiesaswell,includingdevelopedeconomies.Atthesametimetheresultshavegeneralimplications:
thereareimportantfactorsconnectinglaw,institutions,finance,andgrowthnotwellunderstood.Abetterunderstandingofhowthesenonstandardmechanismsworkcanstillberesearchedindepth.
c) Policyimplicationsoftheresearch
InthispapertheauthorshavealreadyexaminedthreesectorsintheeconomyandfindthePrivateSectorhasbeengrowingmuchfasterthantheothers,contributingtomostoftheeconomicgrowth.ThenwhatthegovernmentshoulddotocontinuepromotingPrivateSectorgrowth?
Besides,Chinahasrealizedeconomicgrowthunderweaklegalandfinancialsystem,thenifChinacantakeactionstoimprovelegalandfinancialsystem,cantheeconomicgrowfaster?
Whatthepolicyimpliesinthepaper?
ImakethefollowingpolicyrecommendationsinviewofthecurrentsituationinChina.
1.Increasefinancialsupportandexpandthefundingsources
Inthispaper,IfindlocalgovernmentplaysanimportantroleinthedevelopmentofPrivateSector.Alternativefinancialchannelsandgovernancemechanismsreplacestandardcorporatemechanisms.TocontinueacceleratingthedevelopmentofthePrivateSector,thegovernmentshouldincreasefinancialandfundingsupportandmakethecorrespondingpreferentialpoliciestosupportthePrivateSector,aswellasStatedandListedSector.
2.Developthelocalfinanceandprivatefinanceactivelyandsteadily
Theregionsshouldactivelypromotemorefinancialinnovationstrategy,makingtheoperationofthefinancialsystemmorecloselywithlocaleconomicdevelopment.SupportfromfinancialinstitutionspromotesvariousSMEsintheregionaleconomicdevelopment,thuscontributingtoregionalemploymentandaddingstrongvitalitytothelocaleconomic.Meanwhile,developmentandgrowthofSMEshavealsoincreasedthesizeoffinancialinstitutions,providingsupportforexpandingbusinessandcreatingbasisconditionsforincreasingoperatingincome.
3.Relievefinancialconstraintsandemphasizetheroleofmarket
Thegovernmentshouldregulatethedevelopmentoffinancialinstitutionsusingmarketmechanisms,promotevariousfinancialinstitutionsandfinancialintermediariesvigorouslyandincreasetheefficiencyoffinancialsystem.Meanwhilegovernmentreducesgovernment'sfinancialintervention,strengthenthemarketmechanismandcreatetheconditionsforfinancialdevelopmentthroughthefinancialsysteminnovation.
d) Methods,especiallytheempiricalmethodsused
Inthispaper,authorsdon’tapplylotsofcomplextestsormodels.Ithinkthemethodsusedaremainlytwo.NextIwilllistfollowedindetail.
1.Comparativeanalysis
Ithinkoneofthefeaturesinthispaperisalargenumberofapplicationsofcomparativeanalysis.AuthorsusecomparativeanalysisinSection2,3,4and5.Whenanalyzingthelegalandfinancialsystem,theauthorsdon’tshowthedataofChinaonly,butcompareChinawithotherdevelopedcountriesinthewestern.Meanwhile,tomakethepapermorepersuasive,theauthorscomparewithotheremergingcountriesnext.Whenresearchingonthedevelopmentofthethreesectors,theylistthedatafrom1996to2002,usinghistoricalcomparison.Next,authorsstudyonthedifferentimportanceofthefinancingchannelsinthethreesectorsrespectively.Finally,theyfocusonthePrivateSector.Forthefirms,authorscomparetheannualreturninthepastfiveyearsandnextthreeyears,theownershipandfinancialchannelswhenstartupandcurrent.Iftheyapplylotsofmodelsandconductmanycomplextests,wemaynotunderstand.Thiscomparativeanalysisalsomakestheideaclearandsimple.
2.Empiricalmethods
Inthispaper,empiricalmethodsmainlyconcentratedonSection4.Theauthorsperformthreedifferentsetsofempiricaltestsfindsimilarresults.Concreteempiricalmodelsarepresentedbelow.
Method1:
“Syntheticfirm”approach
Step1:
UsingthesummarystatisticsfromLLSVsamplestocreatea“syntheticFirm”foreachofthe33countries.Eachfirmcharacteristicisequaltothemedianofthesamevariable.Followingthesameprocedure,asyntheticfirmisalsocreatedforChinabasedontheinformationof1,100+firms.
Step2:
ThreeOLSregressionsarerunonthe33(LLSVcountries)“synthetic”observations.Thedependentvariablesinthesetestsare:
(1)dividend/earningsratio;
(2)dividend/salesratio;and,(3)Tobin’sQ(measuredbymarket-to-bookassetsratio).TheindependentvariablesarethesameonesusedinLLSV.Basedontheresultsfromeachofthethreeregressions,wethenconductanout-ofsamplepredictionforChinausingtheestimatedcoefficientsandvariances.
Step3:
Comparethe“true”(observed)firmcharacteristicsoftheChinesesyntheticfirmtothosepredictedvaluesfromStep2,andseewhetherthetruevaluefallsintheboundariesofpredictedvalues.
Method2:
“Alpha”approach-utilizingthealphanotationfromassetpricingmodels
Therearetwoversionsofthismodel:
restrictedandunrestricted,dependingonwhetherwerestrictthecoefficientsoneachindependentvariabletobethesameforChinesefirmsandforfirmsinothercountries.
Method2-1:
RestrictedModel
Method2-2:
Unrestrictedmodel
Method3:
Firmlevelout-of-sampleprediction
Authorsalsoperformfirm-levelout-of-samplepredictions,basedontheregressionresultsfromLLSV.Theresultsaresimilartotheabovetwomethods.Method3canactuallybeproventobemathematicallyidentica
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