July 4th, 2018

Discussion Paper 2018/4 is now available: Rongrong Sun: Requiem for the Interest-Rate Controls in China

Abstract:

This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC’s replacement monetary framework. I show that the interest-rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which in turn drove deposits out of commercial banks. Concerned by deterioration of bank profits and build-up of financial frangibility, the PBC has been pushing strongly for interest-rate liberalization. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.

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May 8th, 2018

Discussion Paper 2018/3 is now available: Michael Funke, Rongrong Sun, Linxu Zhu: The Credit Risk of Chinese Households – A Micro-Level Assessment

Abstract: Household borrowing in China has increased considerably in recent years, raising concerns about the household sector’s vulnerability and implications for the stability of the financial system. We construct a number of granular debt-burden indicators at the level of individual Chinese households and calculate the share of households that are financially vulnerable using the three available waves (2011, 2013 and 2015) of China’s Household Finance Survey. Overall loan-to-value (LTV) ratios appear safe and sound at first glance, but closer scrutiny reveals that Chinese households in the lowest income quintile face high vulnerability and struggle to meet their debt commitments. Our stress tests suggest that Chinese households in higher quintiles, despite the huge increase in household indebtedness, are not particularly vulnerable to declining incomes or falling house prices.

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May 2nd, 2018

We are proud to announce our new CFDS Monetary Policy Reports. New Reports will be available after every major policy change but at least once per quarter. With our reports we hope to provide a concise and timely assessment that makes Chinese monetary policy more accesible to an international audience.

March 30th, 2018

Discussion Paper 2018/2 is now available: Dia, E. / Jiang, L. / Menna, L. / Zhang L.: Common Banking across Heterogenous Regions

Abstract: We describe the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces and find empirically that the main drivers of interest margins are resource costs. We build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial levels. Our model can explain a considerable share of the interest margin charged at the provinicial level, and we find evidence that when Chinese banks adopt a technology imposing the same capital share across provinces, their productivity becomes substantially lower. Since the differences in wages in Chinese provinces are substantial, the adoption of a common technology implies an inefficient industrial structure for the banking industry and a substantial cost for the economy. The adoption of a standardized technology also generates a stronger response of the loan rate to productivity shocks, and thus the capability of banks to smooth regional idiosyncratic productivity shocks hitting firms declines substantially.

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March 24th, 2018

We are excited to announce that we started our first Policy Forum on current political and economic issues today. Take a look at our first issue about Trumps new protectionism.

Policy Forum 1 (March 2018)

March 13th, 2018

Discussion Paper 2018/1 is now available: El-Shagi, Makram / Yamarik, Steven: State-Level Capital and Investment: Refinements and Update

Abstract: This paper presents updated estimates for state-level capital and investment for 1950 to 2015. We improve upon the procedure of Garofalo and Yamarik (2002) and Yamarik (2013) by using quantity measures to apportion the mining capital stock and a geometric pattern of depreciation to derive investment data. In an empirical application we use our data to estimate the production function and a simple growth model. We find coefficient estimates that support constant returns to scale and a 1/3 output elasticity of capital. These results are consistent with past regional and cross-country papers, supporting the plausibility of our data.

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December 29th, 2017

Discussion Paper 2017/5 is now available: El-Shagi, Makram / Zhang, Lin: Trade Effects of Silver Price Fluctuations in 19th Century China - A Macro Approach

Abstract: We assess the role of silver price fluctuations on Chinese trade and GDP during the late Qing dynasty, when China still had a bimetallic monetary system where silver was mostly used for trade. Using a structural VAR with a newly proposed small sample bias correction and blockwise recursive identication, we identify the impact of silver price shocks on the Chinese economy from 1867 to 1910. We find that silver price changes have substantial impact on trade, but barely affect GDP. Our results can partly be applied to the analysis of the role of vehicle currencies in today's emerging economies.

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