VoxChina column: Air Pollution, Health Spending and Willingness to Pay for Clean Air in China

Recent VoxChina column by Shanjun Li, Deyu Rao, Nahim Bin Zahur, Panle Jia Barwick
Aug 23, 2017

Title: Air Pollution, Health Spending and Willingness to Pay for Clean Air in China

Abstract: A study shows that reducing PM2.5 in China can lead to significant health benefit. A reduction of PM2.5 by 10 μg/m3 (about 20% from the current level) could result in an annual saving of 75 billion Yuan (or over 2%) in healthcare expenditure. The benefit from improved air quality proposed by recent national policies in China could justify large investment in cleanup activities.

人民日报海外网:康奈尔大学中国经济研究所举办首届夏令营

2017-08-30 09:38:23        来源:海外网

海外网 2017年夏天,康奈尔大学中国经济研究所迎来了首届暑期夏令营开营。师生学员来自人民大学,中央财经大学,北京师范大学,厦门大学,上海财经大学,南京审计大学,复旦大学,中国农业大学等著名中国高校。

入学迎新

7月12日晚,康奈尔大学西校区迎来了参加夏令营的同学和老师们。大家从北京集合出发,经历了20个小时的旅程,跨越了三个国家终于来到了梦想中的康奈尔大学。

在次日开学典礼上,康奈尔大学中国经济研究所的两位主任,李善军教授和贾攀乐教授首先向参加首届CICER夏令营同学表达了热烈的欢迎;随后他们为大家介绍了CICER的创办,发展和未来;并且向参加夏令营的师生表达了他们的期望;希望同学们都能在这三周时间内收获知识,收获经历,收获友谊,收获成果。

康奈尔大学主管外事的副教务长Laura Spitz教授以及商学院主管外事的院长Rohit Verma教授也来到了开学典礼的现场,并代表康奈尔大学对夏令营的同学们表示了热烈的欢迎。

之后,紧张的学习生活开始了。在接下来的两周半的时间里,主办方邀请来了常青藤盟校的多位著名教授和金融业界的翘楚为大家授课;同时邀请了康奈尔大学在读的优秀的学姐学长们给大家分享留学生活经验;并且在课余的时间带领师生游览参观了学校周边的风景名胜。

中国驻纽约总领事章启月大使亲切慰问

在夏令营的第一周,夏令营迎来了中国驻纽约总领事馆总领事章启月大使,章大使探望了夏令营的同学和老师们。章大使鼓励同学们要认真学习,感受美国文化,并祝愿大家未来都有很好的发展。

在这次夏令营中,主办方还为同学们请来了重量级的授课嘉宾们。为了更好的让同学们了解在美国的学习生活情况,以及申请北美研究生的第一手资料;主办方除请来了优秀的学长学姐们与大家分享经验之外,院方还邀请了交流会的重磅嘉宾,康奈尔大学应用经济与管理学院研究生项目主任Arnab Basu教授和副主任Calum Turvey教授,两位教授给大家详细讲解了申请研究生的流程以及注意事项。

丰富的课外活动

课余时间,主办方也为同学们精心安排了丰富的课外活动。同学们参观了羊驼农场、参观了拥有古老历史的葡萄园和酒庄、在国家公园里品尝了美食烧烤,并且参观了世界7大奇观之一的尼亚加拉大瀑布等等。

毕业典礼

两周半之后,参加本次夏令营的同学们参加了结业考试,体验了一次常春藤联盟的考试氛围。考试结束后,同学们参加了毕业典礼。毕业典礼上,康奈尔大学农业与生命科学学院的执行院长Max Pfeffer教授向同学们致辞,他鼓励大家将康奈尔大学作为申请北美研究生的首选,并且祝他们未来的学习生活一切顺利。随后,主办方为同学们们颁发了结业证书。

华盛顿&纽约

在夏令营的最后一周,同学们参访了华盛顿特区和纽约。主办方带领大家游览了如白宫、美国国会山、林肯纪念和堂世界银行 (The World Bank)等名胜及大型商业机构。

在纽约市,同学们游览了华尔街、自由女神像、唐人街等著名景点;品尝了的来自江湖四海的风味美食;走访了哥伦比亚大学,并在哥大商学院聆听精彩演讲。

三周时间虽然短暂,但大家收获了知识,收获了友谊,也收获了无数的感动,同学纷纷表示期待以后再次相见。

责编:侯兴川、夏丽娟

Research: Better Lucky Than Rich? Welfare Analysis of Automobile License Allocations in Beijing and Shanghai

Prof. Shanjun Li (CICER co-director)'s research on vehicle purchase restrictions and license allocation is accepted by the Review of Economic Studies.    

Paper: Better Lucky Than Rich? Welfare Analysis of Automobile License Allocations in Beijing and Shanghai

Abstract: Economists often favor market-based mechanisms (e.g., auction) over non-market based mechanisms (e.g., lottery) for allocating scarce public resources on grounds of economic efficiency and revenue generation. When the usage of the resources in question generates negative externalities that are increasing in willingness-to-pay (WTP), the welfare comparison can become ambiguous. Both types of mechanisms are being used in China's major cities to distribute limited vehicle licenses as a measure to combat worsening traffic congestion and urban pollution. While Beijing employs non-transferable lotteries, Shanghai uses an auction system. This paper empirically quantifies the welfare consequences of the two mechanisms by taking into account both allocation efficiency and automobile externalities post-allocation. Our analysis shows that different allocation mechanisms lead to dramatic differences in social welfare. Although the lottery system in Beijing has a large advantage in reducing externalities from automobile use than a uniform price auction, the advantage is offset by the significant welfare loss from misallocation. The lottery system forewent nearly 36 billion RMB (or $6 billion) in social welfare in Beijing in 2012 alone. A uniform-price auction would have generated 21.6 billion RMB to Beijing municipal government, more than covering all the subsidies to the local public transit system.

Research: WTO Accession and Performance of Chinese Manufacturing Firms

Prof. Yifan Zhang (CICER faculty affiliate)'s research on the impact of WTO on Chinese manufacturing sectors is accepted by the American Economic Review.

Paper: WTO Accession and Performance of Chinese Manufacturing Firms 

Abstract: We examine the effects of the trade liberalization that accompanied China’s WTO accession on the evolution of markups and productivity of Chinese manufacturing firms. Although these two dimensions of performance cannot be separately identified when firm output is measured by revenue, we show that detailed price deflators make it possible to estimate the average effect of industry-level tariff reductions on both dimensions separately. Several novel findings emerge. First, cuts in output tariffs reduce markups, but raise productivity. Second, the pro-competitive effects are most important for incumbents, while efficiency gains dominate for new entrants. Third, cuts in input tariffs raise both markups and productivity. We highlight several mechanisms operating in liberalized sectors that help explain our findings in the Chinese context. Liberalized sectors saw an increase in the exit of private firms and more frequent replacement of management in badly performing state-owned firms. Both patterns are likely to reduce agency problems. The initial productivity of new entrants is higher in more open sectors. And while lower input tariffs had only a limited role in increasing access to imported intermediates, they had a strong price-reducing effect, even on domestically produced intermediates.

Prescription for treating urban diseases (治理大城市病的药方)

美国康奈尔大学中国经济研究所历时2年研究开出

治理大城市病的药方

2017-06-16 09:53:59       来源:海外网

(相关学术文章/related academic paper: The Marginal Cost of Traffic Congestion and Road Pricing: Evidence from a Natural Experiment in Beijing

交通拥堵,是世界各大城市尤其是中等收入国家的“城市病”。近年来,北京市政府多管齐下,实行包括“摇号购车”、“尾号限行”等降低小汽车出行强度、提高交通供给能力、挖掘交通设施潜能、优化职住平衡的措施,治理交通拥堵“城市病”,取得了一定效果。

“国际经验告诉我们,单纯依赖供给侧或者行政手段很难有效的解决拥堵问题。治理拥堵需要一个系统的方法包括城市规划和交通技术的改善以及消费者观念上的转变,但核心应该是道路使用付费制度,即拥堵费制度。”美国康奈尔大学中国经济研究所主任李善军建议,为了进一步解决交通堵塞这个世界性难题,北京应改在大规模改善公共交通之后,开始征收拥堵费。

“征收拥堵费,是一种被经济学家们公认的社会最优的政策调控方式。”李善军介绍,该对策是诺贝尔经济学奖获得者威廉•维克里在1959年为美国纽约市交通厅做解决拥堵问题的咨询报告中首先提出的。其经济学原理在于,通过征收拥堵费使扭曲的交通资源价格回归正常。“我们应该转变观念,把道路作为资源或生产投入来看待。如果我们免费提供一个好的资源或生产投入,对这一资源的需求就会过大。拥堵和污染从根本上讲都是由于资源,比如道路和清洁空气定价不合理导致的”。

具体来讲,每一辆车出行都会增加交通流量,导致其他车辆速度下降。如果道路使用者出行只考虑自身成本,不考虑社会成本,会带来过度的交通需求和拥堵。如果用经济杠杆对车辆征收拥堵费,道路使用者会考量自身成本核算,使交通需求回归较合理水平。

征收拥堵费在世界其他国家许多城市已经有成功应用的先例。早在1975年,新加坡就在世界银行帮助下开始征收拥堵费。近年来,英国伦敦、挪威斯德哥尔摩、意大利米兰,美国洛杉矶、华盛顿特区等一些欧美大城市也开始应用不同形式的拥堵费政策。研究表明,上述城市的交通速度分别提高了10到30个百分点。

为探索北京征收拥堵费的可行性,近两年来,美国康奈尔大学中国经济研究所的研究团队利用北京交通大数据和世界上先进精确的大数据技术,兼顾社会效益、技术可行、效率与公平等因素,进行研究。该研究测算表明,在北京市中心区的高峰期,每辆车每公里会多产生1.02元的社会成本,交通拥堵一年将造成近500亿元的社会损失,占当年北京市国民生产总值的2.34%。如果征收拥堵费,具体数额应根据路段和时段的不同来调整,约为每公里0.05到0.39元之间。实施拥堵费制度后,北京市中心区域的交通速度短期内至少可提升11%,长期效果会更加显著,每年社会福利提高可达15亿元,同时还可以带来400亿元的收入。

“拥堵费制度可以提高资源分配的效率,同时也涉及公平问题。这一政策的实施对不同的社会群体会带来不同的影响。这也关乎民众对该政策的接受程度。”李善军表示,为了调节政策对一部分人可能造成的负面影响,政府需要制定拥堵费收费分配等相应配套政策。

上述研究建议,拥堵费带来的可观税收收入可以用于交通基础设施建设,提高公共交通质量,最大限度的满足民众的出行需要,或者通过不同方式返还给利益受损群体,进一步帮助出行者选择绿色出行方式,达到城市交通的良性循环,同时提高空气质量和居民的生活质量,最终实现公平与效率的统一。(李晓宏)

How Trump gave China’s ‘Belt and Road’ scheme a boost

Beijing initiative helps Chinese companies explore markets along ancient Silk Road trade route.

By Cary Huang
(Read article in PDF format or Read article at South China Morning Post)

Chinese President Xi Jinping’s ‘Belt and Road’ trade development initiative, always ambitious, has been given a boost by American counterpart Donald Trump’s protectionist trade agenda and isolationist diplomacy.

In just a few months, the US leader’s populist policy prescription has helped turn something originally envisaged as a scheme to export Chinese overcapacity into a standard-bearer for globalisation.

Professor Shanjun Li, a Cornell University economist, said Trump’s protectionism could help the belt and road scheme gain legitimacy as a countervailing force promoting international trade in the region.

The subtle message behind China’s longest round-the-world naval tour

“China could develop a role as an economic leader, and fill the void left by US protectionism in the international market,” he said.

That could also increase China’s soft power, Li said, and mark a turning point in its international influence.

Sinologist Kerry Brown, the director of the Lau China Institute at King’s College, London, described the belt and road initiative as “China’s first real attempt to spell out more proactively what its vision of its regional and global role is”, but cautioned that concrete achievements had so far been hard to spot.

The idea has certainly gained the interest and engaged with the emotions of those outside China as never before,” Brown said. “In that sense, it can be called a success.”

The belt and road idea was first raised by Xu Shanda, a former deputy director of the State Administration of Taxation, who proposed in 2009 that China invest in neighbouring countries as a way to promote demand for the country’s exports.

Xi gave the plan his blessing in a speech to the Indonesian parliament during a state visit in October 2013, and just over a year later announced the creation of a US$40 billion development fund to help finance belt and road projects.

The whole initiative, officially known as the Silk Road Economic Belt and the 21st Century Maritime Silk Road, comprises a network of ports and naval bases connected by bridges, canals, roads and railway lines – all built and operated with Chinese participation.

How China’s belt and road is transforming Asean

The ancient silk road, dating back to the Han dynasty (206BC-AD220), was an East-West trade and cultural exchange network, stretching from Japan to the countries surrounding the Mediterranean Sea, that linked China with Eurasia. But earliest overland routes for that exchanged went unnamed until the mid-19th century, when German geologist Baron Ferdinand von Richthofen dubbed them Die Seidenstrasse (the Silk Road).

China plans not just to revive the overland trade route, but also a maritime one, befitting its ambition to transform itself from a big continental country to a strong maritime power. That route will encompass more than 20 countries, stretching from the Pacific to the Mediterranean, via the Indian Ocean, Persian Gulf and Red Sea.

The shadow of a participant is seen on a map illustrating the ‘Belt and Road Initiative’ at the Asian Financial Forum in Hong Kong in January 2016. Photo: Reuters

Analysts said Xi’s plan aimed to kill three birds – economic, political and diplomatic – with one stone.

Economically speaking, the plan is seen as promoting free trade, investment and economic globalisation by reducing trade barriers and increasing opportunities for investors. Policymakers in Beijing want it to help Chinese companies explore overseas markets along the ancient trade route, promote development of the country’s underdeveloped west, export China’s industrial overcapacity and unearth new sources of economic growth amid a slowdown that started in 2010.

Politically, as the world’s last major communist-ruled nation, China needs friends and political allies to offset its post-cold-war ideological isolation following the collapse of the Soviet Union and Soviet client states in Central and Eastern Europe in the early 1990s. Beijing also wants to restore its leadership status in the developing world by reviving the non-aligned movement.

On the belt and road, the Chinese civilisation is on the march

Diplomatically, China aims to use its rising economic clout to expand its regional and global influence so that it rivals that of the United States, the world’s sole superpower, thus restoring China’s historic position as a global centre of trade, culture and politics.

In concrete terms, the plan aims to create a network of improved infrastructure spanning 65 countries and encompassing 60 per cent of the world’s population and about a third of its economic output.

Li said Chinese policymakers viewed the initiative as a way of facilitating and speeding up economic growth in the country’s less-developed western region, which would benefit the whole country.

Many less-developed countries in the region are also likely to welcome China’s offer to help solve their infrastructure woes. Countries covered by the initiative include Mongolia, Laos, Cambodia, Kyrgyzstan, Pakistan, Tajikistan, Bangladesh, Nepal and Myanmar – all of which rank among the bottom 40 countries for infrastructure quality, according to the World Economic Forum. India, the second-most-populous nation in the world, is also known for its infamously inadequate infrastructure.

Armed with about US$3 trillion in foreign exchange reserves, Beijing has dramatically scaled up its loan book to developing economies that have been largely ignored by international investors and Western lenders. Besides the US$40 billion Silk Road Fund, China has also played a leading role in the launch of the Beijing-based, US$100 billion Asian Infrastructure Investment Bank (AIIB) in October 2014 and the Shanghai-based, US$50 billion New Development Bank in July 2015, which was jointly funded by the five big developing economies – Brazil, Russia, India, China, and South Africa – collectively known as the BRICS.

Belt and Road points the way to a 21st-century Renaissance, if China stays true to its vision

Some economists said China’s initiative might help spur other lenders into action, with borrowers speaking approvingly of growing competition in both bilateral and multilateral financing. But Alicia Garcia-Herrero, chief Asia-Pacific economist at Natixis, who will be speaking at next week’s Belt and Road Forum for International Cooperation in Beijing, expressed doubts about the huge amount of investment financing required, especially given the AIIB’s relatively small size. The World Bank borrows US$40 billion to US$50 billion a year, which it then lends out.

“The key issue about the belt and road is not really whether it makes sense – it does – but rather whether such a massive project can be financed easily,” Garcia-Herrero said, noting that US$5 trillion was needed in next five years and more after that.

Louis Kuijs, head of Asia economics at consultancy Oxford Economics, said that while the impact on short-term economic growth in other countries was likely to be small, the belt and road initiative could have a significant impact on their growth and development in the longer term if the projects were well run.

However, Kuijs said, “in countries with relatively weak governance and accountability, the risk of projects going bad is substantial”.

How China’s belt and road can be a pathway to more equitable globalisation

By the end of last year, more than 100 countries and international organisations were supporting the initiative, according to the Communist Party mouthpiece People’s Daily. China has now signed memoranda with more than 40 countries, cooperation agreements with more than 40 countries in the belt and road region and industrial capacity cooperation agreements with more than 30. Construction of the China-Pakistan Economic Corridor is in full swing, guidelines for the China-Mongolia-Russia Economic Corridor have been signed and the building of the rail links that will comprise the New Eurasian Land Bridge is being steadily promoted.

Some diplomatic observers also view the belt and road initiative as a new, China-led mechanism for land-based and maritime security cooperation.

China, eager to secure the energy supplies needed to fuel its manufacturing-based economy, gets more than half its crude oil from belt and road in countries. It views better land transport connections with Central Asia and the Middle East as a way to secure a stable, long-term supply of energy.

Unlike other current and former great powers, such the US and Britain, which relied heavily on control of maritime sea lanes for global clout, China’s geographic position means its supply network will be largely land-based.

Professor John Ciorciari, director of the International Policy Centre at the University of Michigan, said

Belt and Road projects offer huge opportunities, but also present sources of risk for Chinese banks

China needed to “avoid undue reliance on trade by sea, where China’s major rivals will likely enjoy superior military capabilities for some time”.

Some also see the plan as part of Beijing’s efforts to combat terrorism and separatism, because boosting the economic development of underdeveloped western China, where most of the country’s Muslims live, would help address conditions that can fuel social and political unrest. In Xinjiang, where Turkic-speaking Uygurs are the biggest ethnic group, the East Turkestan Islamic Movement is seeking independence from China. Xinjiang borders eight belt and road countries: Mongolia, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Afghanistan, Pakistan and India.

But Ciorciari cautioned there would be winners and losers from trade and investment, and the increased movement of goods and services would also create many more links between people, including some opposed to the government in Beijing.

He said the main value of the initiative to China was that it was laying the foundation – quite literally – for expanded Chinese economic and political influence across the Eurasian landmass.

News: Can Xi, Trump seal a Sino-US grand deal?

Victor Nee says that, despite their starkly different personalities, Donald Trump and Xi Jinping actually have much in common. Now, with reciprocal visits all but sealed, it remains to be seen how the two presidents steer the bilateral relationship.

By Victor Nee
via South China Morning Post

US President Donald Trump has embarked on an unprecedented form of foreign policy, using his Twitter account to remake the world order. One pole of any emergent world order is China. Here, his provocations, including the phone call with Taiwan’s president, Tsai Ing-wen, off-the-cuff remarks on rethinking the US stance on the one-China policy, and campaign charges labeling China a currency manipulator, are nothing less than confrontational.

Yet, Trump has had what he describes as a very friendly phone conversation with his Chinese counterpart, Xi Jinping (習近平). What does this mean for the future of an uncertain US-China relationship?

Politics aside, Trump and Xi could bond as ‘strong men’

Under the surface of Trump’s bluster and China’s quiet diplomacy are two countries led by men who have much in common. Both are nationalists seeking to restore their country’s greatness. Trump’s campaign to “make America great again” and Xi’s “Chinese dream” both aim to achieve nationalist restoration.

Both men inherited the capital that launched their careers. Trump came into his financial capital from his father’s real estate business, and Xi was a princeling and heir to the political capital of his father, a respected leader of the Chinese communist revolution.

Both men used their inherited capital to launch ambitious careers in their own ways. Trump built a global brand, and far-flung real estate and brand-name empire. Xi turned to a political career after graduating from Tsinghua University, first serving as personal secretary to a powerful member of the Politburo and then taking an unusual turn in assuming a job in Hebei ( 河北 ) province, as a deputy party secretary of a rural county. From there, he began a swift ascent from provincial leadership to the commanding heights of the country’s political elite.

However, though Trump and Xi inherited their respective forms of capital, both believe they are self-made. Of course, similarities in personal background come with obvious differences in personality. Trump is impulsive in responding to perceived criticism. He is thin-skinned, and quick to hit back with insults and counterpunches vented through hyperbole. Xi, by contrast, is an engineer by training, and is methodical and detailed in his planning and political moves.

Trump, as the self-proclaimed consummate dealmaker, and Xi as the chemical engineer, see in their newfound relationship an opportunity for a grand deal between the US and China. This is, after all, what was behind their mutual invitations to visit each other’s countries, with Xi reportedly set to visit Trump at his Mar-a-Lago estate in Florida early next month.

The outline of a bilateral deal has yet to be negotiated, but there is little doubt that it will involve Taiwan, bilateral trade and national security.

How can Xi Jinping project strength in first handshake with Trump?

What will be the elements of a grand deal revitalising a strained relationship between the US and China? First, that there won’t be a war between the two over shoals in the South China Sea or the uninhabited Diaoyu, or Senkaku, islands, claimed by both China and Japan. Second, Trump will have the bilateral trade deal he wants from China, even while the Chinese economy gains momentum, stimulated by free-trade agreements with other countries in the Asia-Pacific

Taiwan will not become independent and, with other East Asian “tigers”, will move towards closer social and possibly political accommodation with the mainland. Taiwan’s economy is already closely linked with that of the mainland.

North Korea’s nuclear blackmail will be curbed, if not checked, through effective sanctions imposed by China and the US. This could make the installation of a US-South Korea anti-missile shield (THAAD) a lower priority, given reduced tension on the Korean peninsula.

Why the US won’t label China a ‘currency manipulator’

What contributes to the likelihood of a grand deal boils down to good feng shui shared structurally by the two Pacific Rim superpowers. The US and China are separated by a vast ocean, but their economies are tethered by an increasingly wide range of mutual interests and dependence – and by two leaders who surprisingly share much in common.

Victor Nee is the Frank and Rosa Rhodes Professor at Cornell University. He is completing a decade-long study of the emergence of modern capitalism in China, and author of Capitalism from Below: Markets and Institutional Change in China.

Read more at South China Morning Post

New Book Launch - Gaining Currency: The Rise of the Renminbi by Eswar Prasad

Gaining Currency: The Rise of the Renminbi (Oxford University Press, October 2016; gainingcurrency.com), a new book by Eswar Prasad, will be launched at the Brookings Institution on Friday, September 23rd, 2:00-3:30 p.m. 

Panelists: 

Caroline Atkinson, Head of Global Public Policy, Google, and former Deputy National Security Advisor, White House

Ben Bernanke, Distinguished Fellow, Brookings Institution, and former Chair of the Federal Reserve Board

Jin Zhongxia, Executive Director for China at the IMF, and former Director General of Research Institute, People’s Bank of China

Eswar Prasad, Cornell University and Brookings Institution

Moderator: Greg Ip, Chief Economics Commentator, Wall Street Journal

 

The event will be webcast live (and will also be archived at): https://www.brookings.edu/events/gaining-currency-the-rise-of-the-renminbi/

ISS Project to Study Economics, Politics of China Urbanization

By Lori Sonken

via Cornell Chronicle

One in 10 people on Earth live in China’s cities. Over the past decade, nearly 200 million people in China have moved from rural to urban regions, and 8 million more are expected to relocate every year between now and 2050. Just what this means for China and the world has the attention of the Institute for the Social Sciences’ newest collaborative project, China’s Cities: Divisions and Plans.

“Our lens into China’s cities is focusing on the economic, political and social phenomena at play in China’s urbanization,” says Jeremy Wallace, project leader and associate professor of government.

Joined by Jessica Chen Weiss, also in government; Shanjun Li, Dyson School of Applied Economics and Management; Panle Barwick, economics; and Eli Friedman, international and comparative labor, the interdisciplinary team is examining the factors that divide migrants and native city dwellers, including access to social services, crime, environmental policies and health consequences.

“When migrants move to cities, they face economic as well as cultural and discriminatory barriers that make the move and integration even harder [than in other countries],” Wallace says.

Using surveys, ethnographies and interviews, the team intends to get a better understanding of the issues and attitudes at play in China’s lesser-known cities, such as Zibo and Shenzhen, similar in size to Philadelphia and Chicago, respectively, but practically unknown to anyone outside China. Using interviews, Wallace, Friedman and Chen Weiss will explore attitudes toward social inclusion and exclusion in urban China and their connections with nationalism.

The project also will examine whether environmental policies in China’s cities are effective in curbing pollution and the impact that regulations are having on firms’ behavior and economic policies.

Lori Sonken is the staff writer at the Institute for the Social Sciences.

Read full article at Cornell Chronicle

Ownership Is Key to Fixing China’s SOEs --- Eswar Prasad

Increasing competition and private ownership would help spur the changes needed to reform the country’s state-owned enterprises.



By Eswar Prasad
via The Wall Street Journal

China’s state-owned enterprises remain one of the biggest challenges facing Beijing today. SOEs play an outsize role in the country’s economy, even though they are a major source of corruption and inefficiency. So it was encouraging when the Communist Party’s Third Plenum in late 2013 announced new reform plans.

But Beijing has been going about things the wrong way. Instead of forcing SOEs to operate as commercial entities free of political interference, Beijing is increasing state control. Recent reforms with Chinese characteristics do more to impede rather than promote the changes that are needed

Consider some steps the government has taken. Beijing has increased SOE oversight by Party committees, which play critical roles on the ostensibly independent boards of SOEs. Among other things, this is meant to prevent asset-stripping by unscrupulous managers.

But Party officials themselves are often well-connected and have little relevant managerial or technical expertise. They are hardly the buffers needed against political interference and have little interest in promoting competition.

The government has also cut the salaries of top bosses. The CEOs of major SOEs now make about one-third of their previous salary, equivalent to less than $100,000 a year. Those in the U.S. who support government-mandated egalitarianism would salivate at the prospect of cutting CEO pay to such levels. But there is a cost. Pay compression has led competent middle- and senior-level managers to decamp to the private sector. And pay cuts have hardly improved the incentives facing CEOs.

Beijing has tightened SOE budgets by reducing direct government subsidies, but this is not a viable reform strategy by itself. In the mid-2000s, this led to millions of workers being laid off. The process was then left incomplete, and the surge of bank-financed investment during the global recession of 2009 and 2010 effectively rolled back the changes.

China’s reluctance to reform SOEs is in part related to concerns about social stability. Laying off even tens of thousands of workers, a fraction of the necessary retrenchment, without a strong social safety net and at a time when other employment opportunities are limited could lead to social upheaval.

China should target spending toward a better safety net, one that could provide a buffer for laid-off workers. SOEs aren’t the venue for subsidizing employment and social services such as education and health care.

But Beijing has been reluctant to do this. Instead, it emphasizes fiscal restraint, which makes the government’s fiscal position look stronger than it actually is but has some undesirable side effects.

One consequence is that fiscal costs are diverted through the financial system in the form of cheap and abundant credit, perpetuating inefficiencies. The International Monetary Fund estimates that the traditional SOE sector accounts for about 20% of China’s employment and output but soaks up more than 50% of bank loans. This leaves the more dynamic, employment-generating parts of the economy, such as small- and medium-size firms and service-sector firms, starved of bank credit.

It also distorts the market. Many SOEs are state-sanctioned monopolies and receive subsidized energy and land from provincial governments eager to boost investment. These are the state firms that are most likely to show a profit.

Beijing needs to reduce both its explicit and implicit subsidies to SOEs and open them up to a greater share of private ownership. Opening up protected sectors to more domestic and foreign competition would also spur change.

The financial sector, too, needs reforms. Reducing the incentives for banks to lend to SOEs, including those already technically insolvent, and making corporations more reliant on equity and bond markets, would over time drive them to improve their corporate governance and adopt better auditing and accounting practices.

Allowing corporate defaults would bring discipline to both SOEs and bond markets. But fear of financial-market turmoil appears to be holding back Beijing. In fact, such defaults could force both firms and financial markets to more carefully scrutinize the balance sheets and financial operations of both SOEs and banks.

China’s government has said all the right things about the necessity and urgency of SOE reforms. Now it must act. If these reforms don’t take hold, the country’s financial liberalization and opening of its capital account could end badly.

Mr. Prasad is a professor in the Dyson School at Cornell University and a senior fellow at the Brookings Institution. His new book, “Gaining Currency: The Rise of the Renminbi,” will be published in September 2016 (Oxford).

Read more at The Wall Street Journal

Professor Shanjun Li Chosen for the ACSF Faculty Fellowship

Professor Shanjun Li is chosen for the Faculty Fellowship for Social Sciences, Humanities and Arts supported by Atkinson Center for a Sustainable Future (ACSF). This fellowship program supports Cornell faculty in the social sciences, humanities, and arts who are working in the sustainability arena. The in-residence fellowship provides faculty with teaching leave for one semester and a small research budget as well as opportunities to engage with a broad, interdisciplinary audience on and off campus.

Professor Shanjun Li's  recent research leverages big data to investigate the causes and consequences of China’s most pressing environmental and urban challenges such as air pollution and traffic congestion and examine policy options. During the ACSF residence program, he will evaluate the effectiveness of rapid and large-scale subway expansion in Beijing on reducing traffic congestion and air pollution.

Testimony at U.S. China Economic and Security Review Commission --- Eswar Prasad

Public Hearing on China’s 13th Five-Year Plan: Fiscal and Financial Reforms
China’s Economy and Financial Markets: Reforms and Risks

 

By Eswar S. Prasad

Chairman Shea, Vice Chair Bartholomew, and honorable members of the Commission, thank you for the opportunity to share with you my views on the status of market-oriented economic reforms in China, with particular emphasis on financial market reforms and capital account liberalization, along with a discussion of the risks the economy faces. In this testimony, I will also discuss China’s efforts to expand the international use of its currency, the renminbi (RMB), and how this is tied in to the domestic reform agenda.

These developments have taken place against the backdrop of a challenging domestic environment. Over the past year, China’s GDP growth has slowed significantly, producer prices continue to fall, and various other indicators of economic activity have weakened, including growth in industrial production, investment, and imports. However, the most recent data on GDP growth as well as industrial and services sector activity suggest that the economy has stabilized. Still, some further macroeconomic stimulus might be necessary to hit the government’s growth target of 6.5 percent.

On a more positive note, there has been some progress over the last 2-3 years on growth rebalancing, an important objective of the 12th five-year plan. The consumption to GDP ratio has gone up slightly, the service sector’s share in the economy has risen to over 50 percent, and the household saving rate has declined. China’s current account and trade surpluses have declined from their levels in 2007, although the merchandise trade surplus has climbed back to nearly 6 percent of GDP in the last half of 2015. 


Read full testimony       
Read more about Hearing on China’s 13th Five-Year Plan

Elevating the Yuan’s Global Status --- Eswar Prasad

Ultimately its international value will be determined by the market, but this could help spur further reforms in China.

 

By Eswar Prasad
via The Wall Street Journal

A burning question in international finance is whether China’s yuan should be inducted into the highly selective group of currencies that constitutes the International Monetary Fund’s reserve currency basket, known as the Special Drawing Rights (SDR). The group now includes only the U.S. dollar, euro, Japanese yen and British pound sterling. By the end of this year, the IMF will decide on the yuan’s fate.

This has far-reaching implications, but not, as many believe, because it will signal the yuan’s challenge to the dollar as the dominant global reserve currency. The yuan won’t become a safe-haven currency unless China undertakes the substantial political, legal and institutional reforms necessary to build trust among foreign investors. These changes are unlikely to happen anytime soon, so the dollar’s position is secure for now.

But the IMF’s decision could effect China’s progress on banking and other market-oriented economic reforms. These reforms will determine whether China’s economy gets on a better, less-risky growth path. If China’s reforms stall, global markets will feel the pain.

Chinese leaders have lobbied for inclusion in the SDR basket. Perhaps they hope to free themselves from reliance on the U.S. dollar by elevating the yuan, but the more immediate endgame is their domestic economy. Economic reformers in China have built public support around the idea that the yuan’s status in global finance should match China’s size and prominence in the world economy.

For the yuan to become a major international currency, China needs a raft of domestic reforms. These include a better and well-regulated banking system and a broader range of financial markets, including basic currency derivatives, fewer restrictions on capital flows and a truly market-determined exchange rate. Such reforms would improve financial markets and the allocation of resources in the Chinese economy, yielding more balanced and sustainable growth.

But there is fierce opposition to these reforms, which challenge vested interests that have enormous political clout. The government has used globalization of the yuan as a rallying cry to overcome this opposition and push forward with reforms.

The People’s Bank of China has already committed to fully freeing up interest rates on bank deposits in 2015. This will increase competition for deposits, driving up rates and benefiting savers. Small banks will be able to compete more effectively with large banks. Large banks oppose these reforms, but the PBOC has noted that market-determined domestic interest rates are an important criterion for the yuan’s inclusion in the SDR basket.

In principle, this entire debate is a nonstarter. Since the yuan isn’t freely convertible and its exchange rate isn’t fully market-determined, it is technically not a viable reserve currency. But this matter is more about international geopolitics than economics.

For the IMF, however, the decision is a matter of its own long-term survival. The IMF has had a contentious relationship with China on currency matters, and ignoring China’s explicit desire to join the SDR would create more bad blood.

The agency also wants to avoid another knock on its legitimacy, already tainted by the lack of progress on giving emerging markets their rightful voting shares. Excluding the yuan from the SDR could crystallize the concerns of policy makers in emerging markets that the IMF remains an institution run by and for the benefit of advanced economies.

The IMF’s imprimatur would certainly help, but ultimately market forces will drive the yuan to be adopted as a reserve currency. Foreign investors, including foreign central banks, will hold the yuan if they are convinced of its worth. Unless China develops its financial markets, the IMF’s seal of approval won’t do much for the yuan’s stature.

The U.S. government should welcome the yuan’s claims to reserve-currency status. After SDR inclusion, China’s central bank would find it harder to manage or manipulate the value of its currency to gain a competitive edge for its exports. China will also have more reason to maintain the primacy of the IMF, where the U.S. has considerable influence, in international finance. And China’s financial market opening could create opportunities for U.S. firms, from banks to insurers.

The yuan’s inclusion in the SDR basket might be premature on technical grounds but is timely given its broader ramifications. A positive outcome would be good for China, the U.S. and the international monetary system. There is no good reason to delay.

Read more at The Wall Street Journal

CICER won a grant from the 2016 Jeffrey S. Lehman Fund

Cornell Institute for China Economic Research (CICER) won a grant from the 2016 Jeffrey S. Lehman Fund for Scholarly Exchange with China. The institute will host regular seminars on Chinese economy, organize annual conferences (on campus and in China) around specific topics, and provide research opportunities for undergraduate and graduate students. The Lehman Fund will support some of these institute activities.

The Lehman Fund grant is established in honor of former President Lehman's commitment to fostering Cornell's global linkages, and in particular to building partnerships with Chinese universities, the Lehman Fund supports exchanges and/or research collaborations between Cornell faculty and graduate students and their counterparts at China's major research universities. Through an annual competition, the Fund provides a small number of grants to initiate qualifying research projects, sponsor research-related conferences or workshops, host visitors from China, or support faculty travel to China to work with colleagues there on collaborative research projects. 

CCCI & CICER STUDENT SYMPOSIUM: Topics in Contemporary China Studies

The 2016 CCCI & CICER Student Symposium took place on Saturday, April 9, 2016. Our keynote speaker is Professor Shiping Tang, Professor in the School of International Relations and Public Affairs (SIRPA) at Fudan Univeristy (Shanghai, China). Panel 1 discussed diaspora, market institutions, and the arts in contemporary China. And Panel 2 discussed food Safety, land rights, and automobiles. 

"China’s Cities” Chosen for Cornell Institute for the Social Sciences’ Collaborative Project Funding

The “China’s Cities” project was recently chosen for funding by the Institute for the Social Sciences.  Each collaborative project is comprised of 4-5 Cornell faculty members, researching a cutting-edge and significant social science issue or topic. Priority is given to “shovel ready” projects that build bridges between researchers across the university. 

The “China’s Cities” project is lead by Jeremy Wallace, Associate Professor, Department of Government. Jeremy Wallace is a member of the Cornell Institute for China Economic Research, while team Members, Panle Jia Barwick and Shanjun Li, are the founders and co-directors of the Cornell Institute for China Economic Research.

The Institute for the Social Sciences has fostered excellence in the social sciences at Cornell since its founding in 2004. The ISS encourages collaboration among social scientists across Cornell, supports cutting-edge research on core social science topics, and helps recruit and retain top social science faculty at Cornell. 

For more information about the ISS Collaborative Project and past themed projects click here.