Three Essays on the New Chinese Economy
Over the past two decades, China has been the world’s fastest-growing economy. My dissertation focuses on several important issues in China’s recent development and reform: (1) Financial development and economic growth. It is widely recognized that financial sector reform is crucial to China’s sustainable long-term growth. Therefore, it is important to examine whether there is statistical evidence of causal links among China’s banking sector development, stock market development, and economic growth during the past decade. This essay uses a vector autoregressive (VAR) approach to analyze quarterly data from 1995 to 2005, and shows that as China’s banks improved their efficiency, the resulting development in the banking sector promoted economic growth. On the other hand, due to persistent flaws (e.g., illiquidity, insider trading and fraud), China’s stock markets did not play an identifiable role in promoting economic growth. My conclusion is consistent with studies using similar empirical approaches for developed economies (e.g., US and UK). (2) Share issue privatization: theory. One of the most important restructurings of the Chinese economy has been privatizing its state-owned enterprises by issuing equity shares. Some important cross-country studies on share issue privatization provide empirical evidence that the profitability and productivity of state-owned enterprises improved after privatization. However, theoretical models have yet to generate unambiguous results to support this empirical regularity. My second essay constructs a Stackleberg game between the government and firm managers in China that unambiguously predicts increases in profitability and productivity after privatization. (3) Share issue privatization: evidence. The third essay empirically tests the theoretical predictions of the second. It provides a new and more accurate identification strategy for “privatization”—the actual change of control from the state to private owners. Cross-sectional, time-series and panel evidence supports the theoretical prediction that “change-of-control matters”: state-owned enterprises significantly improve their performance after changes-of-control. Stock market investors also seem to be optimistic about the effects of change-of-control. The improvements of corporate governance, especially the management turnovers associated with transfers of control, significantly contribute to increases in firm profitability.