Capital is a critical factor to the current and long-term development, and credit is the key to realizing the transformation of wealth to capital. This paper studies the relationship between credit and capital from four dimensions.
First, the paper discusses the emergence and evolution of credit. Credit is a special form of value movement conditional on debt repayment and is closely related to commercial economy. The emergence of credit is inseparable from two necessary conditions: the accumulation of wealth and the formation of legal and institutional framework. Accompanied with the development of capital, credit is a catalyst for the transformation of wealth into capital, and is making capital internalization sweep the world. Credit evolves as it coexists with capital, and they are highly dependent on the three stages of wealth creation: the primary form of credit and capital are mainly to satisfy the demand for the subsistence stage; the intermediate form of credit and capital are mainly to satisfy the demand in the well-off stage; and the advanced form of credit and capital are mainly to satisfy the demand in the wealth accumulation stage.
Second, this paper discusses credit's nature and functions. In terms of the nature, credit is a special form of social relationship. At the country level, credit forms the basic structure of society, and is the most extensive and universal communication tool and language in the economic sector; at the international level, credit serves as the general rule and standard governing international conduct, but has not yet been fully globalized. Different countries are in different stages: countries in the first stage do not have fully-built sovereign credit and need to rely on the credit of developed countries in their domestic market, showing a pattern of credit colonization; countries in the second stage have developed their own credit in their domestic market, but still rely on the credit of developed countries internationally; countries in the third stage are essentially developed economies, and with their credit dominating the world they export their credit to the rest of the world to absorb and occupy worldwide wealth.
In terms of the function, this paper discusses the basic functions of credit, such as facilitating transactions of goods and capital, promoting capital formation, and other financial functions. On this basis, the securitization function and the financial market construction function of credit are discussed in detail. Regarding the securitization function, the paper points out that the credit-based capital formation is the prerequisite for securitization; the separation of the three rights of credit, i.e. the right to ownership, the right to income and the right to use, is the basic condition for securitization; and the nature of securitization is determined by the goals and functions of different types of credit. The paper then discusses about personal credit, corporate credit, sovereign credit and international credit. Regarding the function of financial market construction, the paper underlines the abundant resource of savings and the massive demand of investment in China, which, combined together, can promote the transformation of corporate credit-centric market into sovereign credit-centric economy, giving credit a greater role in the social and economic development.
Third, the paper discusses the new challenges and issues about the current credit system. Many countries, including China and its East Asian neighbors, started out as export-oriented economies, attracted a great deal of foreign investment and earned foreign exchange reserves to pay off their international balances—￣a necessary choice for countries at the stage of capital shortage. Meanwhile, a large quantity of US dollar credit poured into the international market, and China as well. China's foreign reserves, in a sense, is a securitized form of savings backed by the dollar's credit and is a component of the global credit dollarization. But the harmful effects of the dollars emerge when countries no longer suffer shortage of wealth and capital. They try to extricate themselves from the dollar trap and seek for new carriers for wealth and capital. The paper also proposes possible solutions to the problems from the perspective of deepening the use of sovereign credit, and puts forward the tentative idea of issuing equity securitization tools based on sovereign credit.
Fourth, in the review and summary section, the paper proposes that the form of credit will continue to evolve with the development of capital, and its evolution direction maybe from individual level to enterprise level, from country level to international level, and from debt credit to equity credit (i.e. fate credit), even to international equity credit that has yet to emerge. In the future, advanced forms of credit will enhance the function of the existing capital markets and enable credit to play a greater role at both micro and macro levels.

Since Schumpeter (1911), innovation has frequently been considered to have a critical role in promoting economic growth; subsequent adherents of this view include Solow (1957) and Kogan et al. (2017). After the 2008 international financial crisis, against a background of slow economic growth and sluggish recovery, many countries, including China, faced the historic goal of economic transformation. In such a transformation, innovation and technological progress would be the major drivers of economic growth. In practice, however, due to the significant investment costs, high levels of uncertainty, and long gestation periods involved in innovative ventures, innovation-focused firms face many financial constraints. Therefore, it is vital to develop a financing system that can better serve firms' R&D activities and thus create an innovation-oriented economy. The question of how to do so has become an important issue for China in both the present and the future.
Theoretically, a well-developed financial system that is capable of encouraging savings, allocating resources, and managing risks can alleviate the severe financial constraints faced in the R&D sector and thus incentivize firm innovation and lead to greater economic growth. In the literature, the relationships between financial development, firm innovation, and economic growth have been widely explored. However, most studies have only focused on the relationship between two of these three, e.g. between financial development and R&D investment or between finance and economic growth. Studies investigating the interactions and transmission mechanisms among all three are surprisingly lacking. Additionally, although there are many relevant empirical studies, there have been few attempts at theoretical modeling and little specific analysis of China's actual situation.
This paper contributes to the literature both theoretically and empirically by highlighting firm innovation as a mechanism through which financial development enhances economic growth and providing specific evidence from China. Specifically, to investigate how financial support affects firm innovation, we introduce into the creative destruction model developed by Howitt and Aghion (1998) a banking sector that takes deposits and allocates credit to producers and researchers. We show that as the financial system evolves, the transformation of savings into investment in the economy improves, and information asymmetry is alleviated. Financial development thus reduces the cost of external financing in the R&D sector, thus stimulating firm innovation incentives and R&D investment and ultimately promoting economic growth. This theoretical prediction is tested empirically using a panel data set of 31 provinces of China over the period 2008-2016. We find that (1) financial development significantly encourages firm innovation; (2) this positive effect is more pronounced for provinces with higher levels of industrialization and foreign investment and lower levels of government expenditure and education; and (3) firm innovation enhances economic growth.
Our theoretical and empirical analysis reveals the endogenous transmission mechanism of “financial development-firm innovation-economic growth” as it operates in China. It thus lays the preliminary theoretical and practical foundation for future reforms to support China's innovation-driven economy.
Based on the empirical results, several policy implications are obtained. First, considering the significant positive effects of financial development on firm innovation, deepening financial reform and promoting financial development will improve the financing environment, foster innovation, and promote technological progress and industrial transformation. Second, it is essential to continue the process of industrialization and opening-up. At the same time, for regions with weak fiscal capacity and scarce human resources (or low education levels), special attention should be paid to utilizing financial development to enhance innovation-driven growth. Third, R&D activities should be encouraged through greater cultivation of creative talent, protection of intellectual property, and support for innovation.

The stability of the real exchange rate is important for economic development. It affects trade volume and investment in addition to the stability of the country's financial and currency markets. The impact of income inequality on the real exchange rate, however, has been underexplored in the literature. To study this, we collect and combine different data sets to form a cross-country panel data covering 172 economies from 1970 to 2016. Armed with this data set, we test whether income inequality impacts the real exchange rate. We find that income inequality negatively covaries with the real exchange rate within non-OECD countries but does not significantly relate to the real exchange rate within OECD countries. In other words, in non-OECD countries, the greater the income inequality, the more overvalued the real exchange rate. To verify the robustness of the results, we perform three tests, and we find that the results are still valid. First, we replace the key variables with indicators from different databases. For example, we use the Gini coefficients in the WDI database and the WIID (World Income Inequality Database) to replace the original income inequality indicators (in the SWIID). The real exchange rate indicator used in the benchmark regression is calculated by the price level measured based on actual output in PWT8.2. We also use indicators calculated using the other two price indices (based on domestic absorption and actual consumption respectively) and the real effective exchange rate published by the WDI and IMF. Second, we perform the regressions based on samples in different periods and varying degrees of income inequality, and obtain results consistent with the main analysis. Third, the real exchange rate also has some impact on income distribution, so the above regressions may have an endogeneity problem. In the absence of suitable instrumental variables, we use the difference GMM and system GMM to re-estimate.
We then explore the channels through which income inequality affects the real exchange rate. One strand of the literature shows that income inequality influences government expenditure. When income inequality is high, the government redistributes income from taxes to mitigate social polarization. Another strand of the literature shows that government expenditure affects the real exchange rate. We conjecture that changes in income inequality affect the demand and relative price of non-tradable goods, thereby affecting the real exchange rate. To confirm our conjecture, based on our empirical model, we find that for a non-OECD country, as its income inequality increases, the share of government expenditure relative to GDP increases. This result is still valid after controlling various factors and using GMM. We also find that when government expenditure increases in non-OECD countries, the non-tradable sector expands and the relative price of non-tradable goods increases. This relationship is not found in OECD countries. Taking a further step, we confirm this main channel and rule out others using the intermediate effect model and the regression-decomposition method of Blanchard et al. (1993).
This paper makes three main contributions. First, our new data set covers 172 economies over more than 40 years, from 1970 and 2016, with rich variations in income inequality, which makes it possible to divide countries into groups without significantly reducing variation. With such a remarkable data set, our statistical results are robust across different specifications. Second, reversal causality between changes in real exchange rates and income inequality cannot be ruled out by regular OLS regressions. The dynamic panel data method used in this paper confirms that our result is not driven by reversal causality. Third, the discovery of a government expenditure channel through which income inequality impacts the real exchange rate complements the literature.
Our results show that a more equal income distribution is beneficial to economic growth because it stabilizes the real exchange rate (Rodrik, 2008); conversely, polarized income distribution leads to persistent overvaluation of the real exchange rate, resulting in financial crises (Gourinchas and Obstfeld, 2012). The policy implication is that mitigating income polarization is fundamental to stabilizing the real exchange rate and enhancing competitiveness. More importantly, if income polarization grows, government spending will increase, which will lead to domestic currency overvaluation. This indicates that policy makers should take into account the impact of income inequality, because it has a long-term impact on the relative price of non-tradable goods and the real exchange rate.

Since China's accession to the WTO, its foreign trade has developed rapidly. However, China's trade gains, i.e., its domestic value added rate of exports (DVAR), remain relatively low. Moreover, China's current international trade situation is increasingly difficult. In recent years, China has repeatedly stressed the need to strengthen financial services to benefit the real economy. Therefore, it is of great theoretical significance to study how financing constraints affect China's export DVAR and how they are regulated by financial liberalization, to strengthen financial services and improve the profitability of foreign trade in the current complex international situation.
This paper takes Chinese manufacturing export firms as the research object and focuses on the effect of financing constraints on the export DVAR of manufacturing firms. First, it examines the negative impact of financing constraints on enterprises' export DVAR and the mechanism by which reduced technological innovation due to financing constraints negatively impacts enterprises' export DVAR. On this basis, this paper analyzes these heterogeneous negative impacts from four perspectives: trade mode, productivity, ownership, and region. Furthermore, it analyzes the regulatory role of financial liberalization in these negative impacts. Finally, it carries out a robustness test to address potential measurement error and endogeneity problems.
In the empirical test, we used fixed effects model. This paper has two theoretical bases. The first is that financing constraints may inhibit export DVAR through reduced technological innovation. The second is that financial liberalization may affect the negative impact of financing constraints on enterprises' export DVAR.
Three data sources are used in this study. The first is the China Industry Business Performance Database, from the National Bureau of Statistics of China. The second is the China Customs Statistics Database, from the China General Administration of Customs. The third is the China Patent Database Abstracts, from the China National Intellectual Property Office.
The main conclusions are as follows. Chinese manufacturing firms' financing constraints significantly inhibit the promotion of their export DVAR, and technological innovation is the main mechanism. Interest rate liberalization can effectively alleviate this inhibition, while increased shadow banking aggravates it. Therefore, we suggest that the government attempt to alleviate the financing constraints of enterprises by continuing to implement cost reduction measures to ease internal financing constraints and increasing financial liberalization to ease external financing constraints. More financing support should also be given to processing trade enterprises, private enterprises, foreign-owned enterprises, low-productivity enterprises, and enterprises in eastern regions. Lastly, measures should be taken to increase enterprises' technological innovation, such as promoting the financing of technology and creating special funds.
This paper makes several contributions to the literature. First, it constructs comprehensive indicators to measure the financing constraints of enterprises and comprehensively measures their export DVAR. In contrast, the indicators of financing constraints selected by previous studies were relatively simple and the measure of export DVAR of enterprises was not comprehensive. Second, the paper more deeply examines the impact of financing constraints on manufacturing firms' export DVAR and explains the low DVAR of Chinese enterprises' exports from the perspective of financing constraints. Third, this paper examines the regulatory role of financial liberalization on interest rate liberalization and the expanding scale of the shadow banking system. Fourth, this paper makes policy suggestions for the promotion of China's export DVAR.

According to data released by the National Statistical Bureau, by the end of June 2013, local government debt in China had reached 10.9 trillion yuan, with an average annual growth rate of 27.38% from 1997 to 2013. By the end of 2018, total local government debt in China was 18.39 trillion yuan. Compared with 2013, it had increased by about 68.71%. The growth rate of local government debt has greatly exceeded local economic growth. Local government debt can be understood as the result of inefficient expansion, which leads to the accumulation of debt risk. To promote high-quality economic development, it is important to continuously improve the use and input-output efficiency of debt. A scientific and systematic debt performance analysis of local governments indicates that promoting economic growth through the rational use of debt is essential. Doing so requires strengthening local government debt management and preventing local government debt risk.
This paper makes several contributions to the literature. First, this paper integrates local government competition, local government debt behavior strategy, and local government debt performance into a unified analytical framework. In other words, it explains how local government competition affects local government debt performance through the interaction of debt behavior strategies in different regions. Second, because of competition and imitation among regions, neighboring regions are not independent economic entities. When devising local debt behavior strategy, local governments consider not only their own situation, but also the debt strategies of other regions. Therefore, this paper uses a spatial Durbin model to empirically test the effect and spatial spillover of local government competition on local government debt performance, and to analyze the influence mechanism from the perspective of soft budget constraint, providing a basis for optimizing local government debt performance from a spatial perspective.
This paper offers a theoretical interpretation of how local government competition affects local government debt performance through the interaction of debt behavior strategies between regions. It finds that under the guise of maximizing the local government's utility, tax competition and public investment competition lead local governments to increase the scale of their debt. At the same time,local government competition leads to a lower debt output conversion rate with the continous and rapid growth of debt, which hinders the improvenment of local government debt performance. This paper conducts global super-efficiency data envelopment analysis to measure local government debt performance, and develops a spatial Durbin model to test the effect of local government competition on local government debt performance, and the path of this effect. It finds that both local government tax competition and public investment competition have a significant positive impact on the growth of local government debt and spatial spillover effect, leading local governments to take the initiative to expand their debt. However, local government tax competition and public investment competition have a negative impact on local government debt performance and a spatial spillover effect. We call this “diminishing returns to scale.” Furthermore, local government competition combined with soft budgetary constraints has a negative impact on local government debt performance. We call this “diminishing utilization efficiency.”
We make a number of suggestions. First, the central authority should restrain the impluse of tax and investment competition,by regulating local preferential tax policies and strengthening investment project management.Second, the scale of local government debt should be strictly controlled; local government debt behavior strategies should be spatially optimized to reduce competition strategies and imitative debt behavior. Third, the central government should establish a cross-regional linkage mechanism of debt performance evaluation and bonus-penalty system.

Since 2017, regulatory authorities in China have promulgated a series of rules to promote the opening up of the banking industry to the international market. There is little consensus about the impact of this opening up on bank risk. The opening up of the banking industry in emerging market countries provides mixed evidence. The banking industry in some of these countries has improved its financial innovation ability and international competitiveness. However, in some countries, it has led to increased operating and development costs in the banking industry, resulting in greater financial risk. It is generally believed that the benefits of opening up depend on an industry's level of development, the stability of the financial system, and the degree of opening up. If the banking industry is relatively stable and has a high level of development, increased openness can improve its profitability and promote the development of the domestic banking industry. However, if the banking industry is relatively weak and has accumulated high risks, then due to opening up, the banking industry will face major challenges from strong foreign financial institutions.
It can be seen that the risk analysis of the opening up of the banking industry has strong heterogeneity. The development experience of other countries has limited relevance to the opening up of the banking industry in China. We should study the risks brought about by opening up and design appropriate institutions based on national conditions and the development of the banking industry. This paper makes several theoretical contributions: it constructs a research framework for opening up and bank risk, expands the theoretical research on the relationship between bank opening and risk-taking under an open economy, and discusses degrees of opening up and their impact on bank risk. It also has practical significance: on the basis of micro-data, it offers an analysis of the impact of opening up on bank risk, providing empirical support and decision-making guidelines for the prevention and control of risk in opening up China's banking industry.
In this paper, the proportion of foreign ownership is used as an proxy for “bringing in,” the proportion of overseas assets as an alternative index for “going out,” and the Z value and rate of non-performing loans as proxies for the operational risk and credit risk of the banking industry. Small and medium-sized commercial banks and large commercial banks are used to examine the relationship between opening up and bank risk. The results show that there is a nonlinear curve between opening up and the risk of commercial banks, and there is a critical point. For small and medium-sized commercial banks, a very high proportion of foreign ownership and very small scale of overseas investment will bring risk. For large commercial banks, there is a threshold range for the scale of overseas investment, which may lead to increased bank risk within that range.
This paper makes the following policy suggestions. The proportion of foreign ownership in small and medium-sized commercial banks should not be too high, and small and medium-sized commercial banks should be encouraged to increase their overseas investment. Large commercial banks can adjust their strategy of opening up according to their target in a specific period. Risk warning and control measures should be strengthened. In expanding the opening up of the banking industry, we should implement the principle of macro-prudence, prudently assess the possible risks, and maintain the overall stability of China's financial system.
The main innovations and contributions of this paper are as follows. First, based on the micro-data of opening up in financial reports and announcements of 392 commercial banks in China, this paper empirically examines the correlation between opening up and bank risk to extract the unique characteristics of China's banking industry opening up to the world, from the perspectives of “bringing in” and “going out.” Second, the paper analyses the critical points in the process of opening up the banking industry, identifies the “degrees” of opening up, and makes policy recommendations for controlling financial risk in this process. In the future, when data are available, we will examine the impact of opening up on bank risk from multiple perspectives.

Green finance is an important strategy for establishing a more ecologically sustainable civilization, according to the 19th CPC National Congress. As active participants in green credit policy, Chinese commercial banks play a crucial role in the relationship between economic growth and the environment. For commercial banks, cost efficiency, resource allocation, and risk control have a key impact on the national economy and social stability as a whole. Although green finance has attracted increasing public attention in recent years, the cost efficiency of the green credit policy remains under-studied. Therefore, this paper focuses on whether commercial banks sacrifice their original cost-efficiency targets in implementing the green credit policy, and whether this policy can result in a win-win situation.
We discuss the cost efficiency of the green credit policy from the perspective of resource allocation. The paper analyzes the mechanism of cost effects, credit risk management and reputation, respectively, based on relevant economic theories and academic references, and it offers three hypotheses, as follows:
H1: Green credit policy can lower banks' cost efficiency by way of the cost effects mechanism. Compared with normal loans, green credit increases environmental audit costs, incurs the cost of training personnel in both ecology and finance, and leads to opportunity costs from transferring loans to green industries (Hu and Zhang, 2016; Ma and Jiang, 2009). Therefore, even if the balance for green credit increases, the profits will be eaten up due to increasing costs.
H2: Green credit policy has a positive impact on bank cost efficiency through the credit risk management mechanism. Commercial banks continuously optimize their risk management tools and adjust credit structures when they implement green credit policy to boost green industries and industrial structures and guide reasonable resource allocation. They can also include environmental risk factors in credit rating systems to avoid bank losses.
H3: Green credit policy has a positive impact on bank cost efficiency through the reputation mechanism. Previous research finds that having a reputation for environmentally responsible behavior makes companies more competitive (Ma and Jiang, 2009). Bank competitiveness is strengthened by the brand effect and product differentiation of the green credit policy, and, at the same time, the social contribution ratio can be elevated by increasing the credit inputs of green industries for the fullest positive effect of the reputation mechanism (Liu et al., 2017).
The paper samples data from 73 Chinese commercial banks during the period 2005-2017. First, it uses the stochastic frontier approach to measure bank cost efficiency. Second, it uses the propensity score matching difference-in-differences method to empirically analyze the net effects of green credit policy on bank cost efficiency. Third, it examines trends in the net effects of green credit policy by applying the marginal dynamic test method. Lastly, it confirms the hypothesis that the green credit policy will lower cost efficiency due to cost effects while also having positive effects that result from credit risk management and the reputation mechanism. Furthermore, we find that the net effects of the green credit policy have a U shape: the negative net effects of the policy worsened from 2007 to 2013 but have flattened out since 2014. Therefore, the gains will overcome the losses by implementing the policy with positive credit risk management and the reputation mechanism in the long run.
Several major suggestions are made based on these empirical results. First, commercial banks should develop their information disclosure system for green credit to reduce the relevant costs, such as setting up a unified information management platform linking the central bank, the China Banking and Insurance Regulatory Commission, the environmental sector and commercial banks. Second, commercial banks should enhance credit risk management by improving the legal system of green finance and establishing collateral agencies. Lastly, commercial banks should engage in green finance to improve their reputation, such as by establishing internal green credit systems according to the Equator Principles and taking environmental risk into consideration when pricing loans.

In recent years, the asset scale of urban commercial banks has grown rapidly, and the liquidity risk of individual urban commercial banks has attracted market attention. Therefore, it is important to standardize the business environment and reduce the liquidity risk of urban commercial banks by analyzing how the government and market can reduce this risk and exploring the key factors that lead to increased liquidity risk.
In response to liquidity risk, urban commercial banks can choose the market model, and ask for help from large banks, borrow money from another bank, sell and buy back, etc. Alternatively, they can choose the government model and solve their short-term difficulties by increasing the government shareholding ratio. It is worth noting that the government shareholding ratio not only includes the direct investment of financial funds, but also the introduction of government support by becoming a state-owned enterprise: examples include China Construction Bank taking over Baoshang Bank or the Industrial and Commercial Bank of China taking over Jinzhou Bank. It can be seen that in this case, China's state-owned big banks embody both the market model and the government model. In the normal course of operations, large commercial banks carry out inter-bank business with urban commercial banks according to the market model. However, in extreme cases, some large commercial banks need to rescue urban commercial banks according to the government model.
Because liquidity risk is a complex concept, there are many indicators for measuring it. Foreign scholars have included inter-bank liability in liquidity risk analysis. The China Banking and Insurance Regulatory Commission has also used the inter-bank liability ratio as an indicator for liquidity risk monitoring. Although in theory, there is no direct relationship between inter-bank liabilities and liquidity risk, due to the phenomenon of inter-bank dependence, the inter-bank payable bonds of some city commercial banks account for more than one fifth of their total liabilities. In addition, city commercial banks with low market ratings must often pay a higher risk premium to obtain inter-bank liabilities, which further increases their subsequent liquidity management pressure. Thus, from the perspective of inter-bank liability, we establish a tripartite governance framework based on the liquidity risk resolution of large banks, urban commercial banks, and local governments to clarify the liquidity risk game mechanism of large banks and urban commercial banks and to obtain the balanced decisions of all parties according to their behavioral preferences. The theoretical results show that the higher the government shareholding ratio, the more likely it is that the city commercial banks can obtain inter-bank liabilities; the stronger the demand for social funds, the higher the opportunity cost of large-scale inter-bank lending, and the less likely it is that the city commercial banks will obtain inter-bank liabilities.
Based on our model, we take a further step, using data from 80 city commercial banks to confirm our theoretical result and hypotheses. Our empirical analysis uses a two-step system GMM, and the regression result shows that the higher the government shareholding ratio, the more likely it is to lead to the increase of inter-bank liabilities of urban commercial banks; this impact is also stronger for high inter-bank debt banks. This may be related to the scale and management strategy of city commercial banks. City commercial banks with low debt levels are generally large listed city commercial banks. Their government shareholding ratios are usually low, their credit ratings are high, and an increase in government shareholding has little impact on their inter-bank debt ratio. City commercial banks with high debt levels are often small-scale city commercial banks whose business scope is concentrated locally. Increasing the government shareholding ratio helps these city commercial banks to improve their credit rating, transmits a signal of increased government credit, and raises the possibility of obtaining inter-bank liability.
The regression results also show that if monetary policy intervention is excluded, the external macroeconomic cycle will also affect the game equilibrium between city commercial banks and large banks. The higher the social financing growth rate, the lower the probability that the city commercial banks will obtain inter-bank liability, and this has a greater impact on banks with high inter-bank debt. Because city commercial banks with high inter-bank debt are usually small in scale and less able to mitigate debt, they are more vulnerable to macroeconomic shocks.
Based on its theoretical and empirical analysis, this paper puts forward policy suggestions on the limits of government behavior, the elimination of an implicit guarantee, the establishment of an internal pricing mechanism for urban commercial bank funds, and the improvement of the supervision system for urban commercial banks. The first is to maintain the neutral principle of competition and establish a modern corporate governance mechanism for urban commercial banks. The second is to build liquidity support and mutual aid mechanisms by taking advantage of weak cycle window periods. The third is to improve the timeliness of risk resolution and strengthen the systematic construction of liquidity risk management.

Financial development can promote the efficient allocation of capital and long-term economic growth. Although per capita income and wealth have increased significantly in China in recent years, 2015 data suggest that most Chinese families do not participate in financial markets. This is called the limited participation phenomenon. Most families neither directly hold stocks nor invest in indirect equity holding instruments such as mutual funds, it is true for families of various wealth levels and this phenomenon exists in many countries.The limited participation phenomenon has many adverse effects on the welfare of households and the long-term growth of the economy. If families do not participate in the financial market at all, they cannot raise their welfare level by holding financial assets, and they have no opportunity to diversify their asset portfolios and smooth their life-long consumption.
This study uses the 2015 Chinese General Social Survey dataset to explore the impact of private and public information on family financial market participation. The logit and probit models commonly used to analyze this problem are susceptible to endogeneity. Therefore, this study uses the propensity score matching method based on a causal inference analysis framework to control the problem of endogeneity. It analyzes and compares the real effects of private information and public information on family financial market participation.
The analysis has two important findings. First, most households in China neither hold financial assets nor have access to private information about financial markets. Access to private information and sufficient public information can significantly increase the probability of family financial market participation. The more channels a household uses to obtain public information and the more public information a household obtains through various channels, the higher the family's probability of participating in the financial market. Second, the effect of public information is generally greater than that of private information on family financial market participation, due to differences in individuals' expectations about the quality of the two types of information. Public information can be obtained through more sources and has greater verifiability than private information, which increases households' belief in the quality of public information. Therefore, public information provides greater incentives to participate in financial markets. However, when a family obtains only a limited amount of public information, the influence of public information in promoting financial market participation does not exceed that of private information.
In 2015, most families in China did not participate in financial markets, which means that many Chinese households did not hold financial assets such as stocks, bonds, funds, etc. This study's findings suggest that this choice is partly influenced by whether a family has private information and the amount of public information it has access to. Currently, most families have no private information and only a limited amount of public information. Therefore, as public information cannot fully exert its ability to stimulate financial market participation and the influence of private information is weak, which lead to the limited participation in financial market of Chinese households.
For China and other developing countries, financial deepening is crucial to achieve higher levels of economic growth in the future. Increasing the amount of public information obtained by households may help to encourage families to participate in financial markets. The amount of public information depends to some extent on the quality of the formal institutions that guarantee the quality of public information. According to the World Bank's Worldwide Governance Indicators, the percentile rank of China's governance effectiveness in 2018 was 69.71, the United States and Japan were 92.31 and 94.23, and Russia and Brazil were 50.96 and 36.06, respectively. This shows that developing countries such as China have room for improvement in this area. The quality of formal institutions can be significantly improved by enhancing the efficiency of the policy formulation and implementation and the credibility of policy commitments. To promote the development of financial markets and long-term economic growth, developing countries can gradually improve the public's subjective expectations of the quality of public information through these measures, which would encourage families to participate in financial markets. This is especially important for developing countries with relatively backward financial development.

The centralized default in China's bond market has aroused widespread concerns about China's credit rating market. The academia has a serious debate about the information effects of credit rating. Some believe that the credit rating hasn't showed the information function correspondingly, while others think that the credit rating has certain information effects. Based on the inconsistent conclusions of the existing research related to the information effects of credit rating, this paper will study three questions below: Firstly, from the total amount of information, whether credit rating has an incremental contribution to the total amount of market information; secondly, from the quality of market information, whether the credit rating has an impact on the information quality; thirdly, what is the relationship between credit rating agencies and analysts and is it an alternative relationship or a complementary relationship？
In order to analyze the above three issues, this paper chooses the perspective of analysts' forecasts to test. The reasons for choosing this perspective are as following: Firstly, using the analysts' forecast performance (analysts' prediction accuracy and divergence) to measure the market information environment is based on the efficient market hypothesis. Under this hypothesis, the analysts' prediction accuracy is influenced by total amount information in the market. Therefore, analysts' predicting performance can be used to measure the level of market information environment. Secondly,as two information intermediaries in the capital market, credit rating agencies' and analysts' concerns about corporate information may be different under the limited attention hypothesis. Credit rating agencies focus on corporate asset repayment ability and corporate risk level, while stock analysts pay main attention to corporate profitability, future development opportunities and so on. The information provided by credit rating agencies and stock analysts can complete each other and improve their own information sets. Therefore, exploring whether credit rating agencies and analysts pay attention to corporate information differently will help us further understand the alternative or complementary relationship among market information intermediaries. Thirdly, up to now, the number of corporate bond default samples in China's bond market is less than 50, which limits us to directly test the information content of credit rating from the perspective of predictive ability. However, under the information efficiency market hypothesis, analysts can use the credit rating information to predict. Therefore, the credit rating information will affect the analysts' forecasting behavior, and then whether the credit rating has information effects can be checked.
The results of this paper show that: Firstly, credit rating can significantly improve analysts' forecasts accuracy, reduce their prediction divergence and optimistic bias and this effect is more pronounced in companies with high information asymmetry or trached by low-capacity analysts and in foreign-invested rating agencies.This manifests that credit rating provides analysts with new information without compromising the informatim quality; Secondly, by dividing the analysts' forecast information into public and private information, we directly test and come to a conclusion that the credit rating can only increase the public information used by the analysts' forecasts, but has no significant impact on the private information. By conducting further analysis, we find that credit rating does not affect analysts' investigating behavior, either. These above conclusions indicate that the disclosure of credit rating information does not affect the private information advantage that analysts have, and the relationship between credit rating agencies and analysts is complementary, rather than substituted.
This study has some inspirations both in theory and in practice. Firstly, strengthening the supervision of credit ratings can improve market information environment and increase the total amount of analysts' forecast information, which provides corresponding evidence for the existence of credit rating information effects. Secondly, as two information intermediaries in the market, credit rating agencies and analysts are not substitutes but complementary because of their different concerns in corporate information. Therefore, the government regulatory authorities should strengthen the construction of these market information intermediaries' function in order to promote the realization of the information efficient market. Thirdly, due to the information effect of credit rating, the regulatory authorities should strengthen the supervision of rating agencies to further ensure the functionality of rating information.

China began to implement the first-day daily limit system at the end of 2013. The system stipulates the effective price of a new stock in the collective bidding stage not to exceed 120% or be lower than 80% of the issue price, and the effective price in the continuous bidding stage not to exceed 144% or be lower than 64% of the issue price. This policy causes the stock price of most companies to increase by about 44% on the first listed day. There are even continuous stock price increases up to the 10% limit, which is the regular stock price limit in China, for several days after an IPO. Investors in the market become much more active and irrational, leading to a serious sub-new-share-price bubble because of the first-day daily limit system.
Hong et al. (2006) have proved that the restriction of sales will lead to a stock price bubble. Their model predicts that the greater the stock price bubble before IPO lockup expirations, the greater the stock price decline afterwards. The theoretical model of Hong et al. (2006) is consistent with our observation of the Chinese market. An unprecedented sub-new-share-price bubble caused by China's first-day daily limit system provides an ideal setting for testing Hong's theory. The previous literature on China has not paid enough attention to recent IPO lockup expirations and does not consider the impact of new stock price controls or speculative bubbles.
This paper uses 1,397 IPO companies from 2006 to 2016 as a research sample. The main findings are as follows. First, the new shares issued during the first-day daily limit period have significantly worse market performance on their lockup expirations, with-8.43% abnormal returns in a [-30,30]estimated window period compared with-2.65% during the non-first-day daily limit period. These shares also have a lower abnormal trading volume and abnormal volatility. The reason is that the first-day daily limit system causes speculative bubbles, and the larger the stock price bubble, the greater the decline subsequent to IPO lockup expirations. Second, when the stock price is more overestimated or investor sentiment is higher at the time of IPO, then the first-day daily limit system has a greater impact subsequent to IPO lockup expirations. This further supports the idea that a speculative bubble is the reason that the first-day daily limit system affects the market performance of new shares. Third, the stocks issued during the implementation of both the IPO first-day daily limit system and the issue price control have significantly worse market performance following lockup expirations. The reason is that the combination of the two regulations causes larger speculative bubbles. Our results support the “lockup expirations and asset bubble burst” theory proposed by Hong et al. (2006).
The main contributions are as follows. First, when the IPO lockup expires, the stock has a significant negative abnormal return and an abnormal trading volume. There are many debates on how to explain this violation of the market efficiency hypothesis. From the speculative bubble perspective, this paper examines the impact of the first-day daily limit system on IPO lockup expirations and gives empirical evidence for the theoretical hypothesis of Hong et al. (2006), thus supplementing the relevant literature on the lockup expiration puzzle. Second, the first-day daily limit system has a far-reaching impact on the new stock market, but related studies are very scarce. This paper helps to deepen the understanding of the economic consequences of the system, and further reveals and evaluates the effect of this policy. Third, this paper has important policy implications for the prevention of financial risks. This study helps explain the sharp fall in China's recent stock price following the lockup expirations. It suggests that a new stock speculative bubble combined with the lockup expiration of many new shares could be an important risk point.
Preventing financial and systemic risk is the focus of current financial regulatory work. The results of this paper show that preventing and controlling the stock price bubble caused by speculation on new stocks would help prevent excessive volatility in the stock market. An appropriate relaxation of the first-day daily limit may help reduce stock price bubbles, which would reduce crash risk when the new shares' lockup expiration occurs. Investors should be aware that stocks that are over-hyped in the early stage of listing have a large decline in stock prices on the lockup expiration day. When investment sentiment is high and the market atmosphere is speculative, investors should pay special attention to high-flying, high-risk stocks, and maintaining investment rationality is of great importance.