Following the 2008 global financial crisis, China adopted a series of stimulus policies to protect against external shocks. These have played a role in stabilizing economic growth but have also promoted increased levels of leverage in various sectors, especially the non-financial enterprise sector. While the leverage rate of the non-financial enterprise sector has risen, the non-performing loan ratio in the banking sector has not shown an upward trend. Intuitively, as leverage increases, the subsequent increase in the external financing premium will also raise borrowing costs and lead to a higher default rate. However, this is not consistent with the data for China during this period. To explain this puzzle, this paper develops a DSGE model that incorporates a bailout mechanism into the financial accelerator model of Bernanke et al. (1999). Our model helps us better understand the default and leverage cycles of the non-financial enterprise sector in China.
Our motivation in introducing a bailout mechanism is that in practice, local governments have incentives to provide direct or implicit bailouts to the enterprise sector to stimulate economic growth. There are two channels: first, the lower default rate resulting from bailouts can help commercial banks to relax constraints on the credit supply, thereby increasing credit to the enterprise sector; second, the lower external financing premiums due to a low default rate can stimulate the enterprise sector to invest more, leading to increased demand for credit and higher leverage. Consequently, bailouts play the dual role of leverage accelerator and default decelerator.
By computing the steady state, the results show that a higher degree of bailout of the nonfinancial enterprise sector leads to higher leverage and a lower default rate. We then simulate and analyze the impact of technology, risk, and bailout shocks on the economy. Technology shocks make leverage increase, and thus can partially explain the variation in leverage. Technology and risk shocks both lead to economic recession, and thus both make the default rate increase; only bailout shocks cause the default rate to fall. Therefore, it is necessary to incorporate the factor of default bailout to explain the characteristics of the non-performing loan ratio of the banking sector.
This paper also simulates a policy experiment on deleveraging and finds that asset prices fall sharply due to deleveraging, which leads to increased leverage. This implies that achieving the policy objective of deleveraging requires asset price stability; thus, financial stability is important for deleveraging policy. Accordingly, a dynamic bailout rule is proposed that considers expected asset prices. Through simulation, we show that when the bailout rule considers expected asset prices, asset prices fluctuate less under technological, risk, and bailout shocks. Reduced fluctuation in asset prices means that capital is more stable under external shocks, which ultimately stabilizes output and consumption and thus improves social welfare.
The main contributions of this paper are threefold. First, it develops a DSGE model with a bailout mechanism based on Bernanke et al. (1999), which provides a framework for understanding the formation mechanism behind the high leverage of the nonfinancial enterprise sector in China. Second, it provides a better understanding of the effects of deleveraging policy and the relationship between deleveraging and financial stability. If deleveraging policy ignores the need to stabilize asset prices or lacks the relevant policy tools, deleveraging will lead to the decline of asset prices, which will bring about recession and increased leverage. This study explains why China's previous deleveraging policies had undesirable outcomes. Third, the proposed model can be extended by introducing nominal rigidities to examine the role of monetary policy in supporting asset prices in the deleveraging process. It explains why the central bank's financial stability function and prudent monetary policy are necessary for the deleveraging process.
This paper's findings suggest that the two objectives of stabilizing economic growth and deleveraging are not necessarily contradictory if supported by a policy of financial stabilization. This conclusion differs from that reached in the previous literature. The model in this paper can also be extended to include both the state-owned and private-owned sectors when the government provides only an incomplete bailout to the former; such a model can be used to further analyze the impact of the bailout mechanism on resource misallocation.

In 2017, Moody's and Standard & Poor's downgraded the credit rating of China's sovereign debt. The Chinese government responded by claiming that these rating agencies had exaggerated China's economic difficulty and underestimated its reform efforts. It is thus a matter of dispute whether the firms' rating methods are applicable to China. For a rapidly developing economy like China, a forward-looking and dynamic judgment of its financial condition is needed, in addition to traditional economic models based on historical data. An index rating system constructed with fixed coefficient weights cannot capture the dynamic development of China's financial markets.
In this paper, we implement a new method based on dynamic model selection with time-varying parameters and factor-augmented vector autoregression (DMS-TVP-FAVAR) to calculate an index of China's financial condition. This method is based on the FAVAR model with dynamic coefficient parameters. Using this TVP-FAVAR model, we have M_j=(2^{^k}-1)different models to construct an indicator system with different combinations of financial variables. According to Raftery et al. (2010), the probability of a given indicator system and model at time t is calculated using the BIS information principle. The model corresponding to the maximum use probability is taken as the dynamically selected model at time t. Without altering its basic structure, this method can dynamically incorporate new factors based on changes in the financial system and structure.
Using the new method, we first calculate the time-varying patterns of the Chinese financial market on a monthly basis from 1996 to 2016, and analyze the effects of different financial markets on China's overall financial condition through the dynamic changes in factor weights. China's financial condition index is composed of eight primary indicators: its monetary policy, foreign exchange market, money market, banking, stock market, bond market, non-traditional financial market, and foreign financial market. We use two macroeconomic variables (output and inflation) as tracking variables to determine the dynamic model selection and the time variance of the coefficients. The monthly output growth rate is represented by the change in industrial value-added, and the inflation rate is measured by the change in CPI. According to our calculation, the China Financial Conditions Index (CFCI) has since 1996 shown cyclical fluctuations. The CFCI was relatively low during the financial crisis, but generally increased during the boom period. Using the breakpoint segmentation method proposed by Bai and Perron (1998), we identify three structural breaks in China's financial condition based on our index: 2000M11, 2007M1, and 2011M8.
In terms of the dynamics of factor weights, we conclude that during the sample period, money supply was the most important factor affecting China's financial condition. As the level of financial development increased, other key variables affecting China's financial condition changed, shifting from traditional banking and stock market factors to factors associated with the non-traditional financial market and foreign exchange market. Note that before and after the 2008 international financial crisis, foreign exchange market and foreign financial market factors had a strong impact on China's financial condition.
The main contribution of this article lies in its use of the DMS-TVP-FAVAR model to construct China's financial condition index and capture the ongoing changes in China's financial status from the 1990s to the present. Our model also explains the various factors leading to these dynamic changes. Compared with other financial condition indices, ours performs better in tracking and characterizing the key structural changes in China's financial development. Unlike the previous literature, we use high-frequency data (i.e., monthly instead of quarterly) to provide a more accurate picture of China's financial condition. We believe that by understanding the dynamic nature of China's financial condition, we can identify potential financial risks in a timely manner. Our findings will also help regulators to implement monetary policy and financial risk management.

Following the subprime mortgage crisis, China's financial market experienced a money shortage in 2013, a stock market crash in 2015, and a bond default crisis in 2018. Due to this turmoil in the domestic and international economic environment, the risk spillover effects of China's financial system have received much attention. As the cross-market and cross-region contagion of financial risks has grown, systemic risk warning and prevention have become the focus of research. Therefore, studying the risk contagion of financial volatility in this context not only provides guidance for regulators on maintaining financial stability and preventing financial crises stemming from systemic risk accumulation, but also has significant implications for investors' portfolio risk management.
To describe the financial systemic risk transmission path and characteristics in China, this paper analyzes the internal risk contagion mechanism of the financial system from the perspective of a volatility spillover network. The risk spillover relationship between markets is used as the connected edges of the network, and the variance contribution (as calculated by the variance decomposition) is used as the adjacency matrix. Next, the complex network of risk spillovers in China's financial system is constructed, and the risk contagion features of China's financial system can be analyzed using the topological structure of the network. We first use the general dynamic factor model to distinguish between the common volatility components of financial return volatility and the idiosyncratic volatility components. Next, based on the volatility spillover effects between the currency market, capital market, commodity trading market, foreign exchange market, real estate market, and gold market, the dynamics of the volatility spillover of the variance decomposition index based on TVP-VAR model are analyzed, and the linkage and risk transfer mechanisms are discussed. After analyzing the directional volatility spillover effects, the variance decomposition network method is used to construct the weighted and directed volatility information spillover network, and the risk contagion characteristics of the financial system network are described from the perspective of the network. Subsequently, the dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) tcopula model is utilized to describe the relationship between the nonlinear volatility index variables, and the optimal portfolio weight and hedging strategy of the volatility index portfolio are calculated. The framework is used for empirical research on different sub-markets within the Chinese financial system.
The research sample comprises the explanatory variable indicators of the 12 secondary financial sub-markets of the Chinese financial system from January 2007 to October 2018, based on data obtained from the Wind database. The empirical study reveals that the absolute values of the net spillover effects of the real estate market and the foreign exchange market are larger than those of other markets. However, due to the comprehensive influence of various factors such as the macroeconomic situation and regulatory policies, the risk spillover effects of the currency market show uncertainties. Although the stock market displays a high degree of risk spillover and risk tolerance, the net spillover effect is not strongly evident, indicating that the stock market plays the main role in transmitting risks between other financial markets.
On the basis of volatility spillovers, we further consider the asset allocation weight of portfolios using stock market volatility indexes and other market volatility indexes. The research conclusions are helpful for understanding the risk contagion mechanism of the financial system, making it possible to strengthen macro-prudential supervision and avoid investment risks.
This study makes three major contributions. First, we use GDFM to extract common volatility shock components and the idiosyncratic volatility components of sub-markets in the financial system. Second, the time-varying vector autoregressive variance decomposition spillover index is used to identify the dynamic linkage of volatility shocks between financial systems. Third, based on the asset allocation of portfolios using the stock market volatility index and other market volatility indexes, the DCC-GARCH tcopula model is used to characterize the non-linear heterogeneous volatility series between financial markets and calculate the optimal portfolio strategy for the volatility index based on the volatility spillover effects.

China's local governments play a key role in the formation of local infrastructure (Zhang and Xiong, 2019). It is not feasible for local governments to fund massive infrastructure projects through regular tax revenue or land sales. However, China's Budget Law, enacted in 1994, strictly prohibited local governments from raising debt. Local Government Financing Platforms (LGFPs) were created by China's local governments to circumvent this legal restriction (Liu and Xiong, 2018; Cong et al., 2019). A local government will inject land reserves or future land sale revenues into the LGFP as collateral to raise money. In a typical arrangement, an LGFP carries either explicit or implicit guarantees from its affiliated local government. It has long been hypothesized that local governments' fiscal stress is the root cause of the rise of China's LGFPs. However, causal evidence supporting this hypothesis remains scarce.
This paper exploits the quasi-experiment of 2004-2006 China's Agricultural Taxes Abolition Reform to identify the causal effect of local government's fiscal stress on the establishment of LGFPs. Chinese counties encountered heterogeneous shocks in this reform because they had different initial levels of reliance on agricultural taxes. We therefore apply a differences-in-differences (DID) strategy to compare the outcomes before and after the reform across counties with different levels of fiscal stress.
We do not have access to the financial statements of county-level LGFPs, so as a feasible method of identifying their establishment, we collect the data on the foundation of each LGFP as disclosed by the China Banking Regulatory Commission (CBRC). Our main outcome variable of interest is a time-variant dummy indicating the existence of an LGFP in a given county. We derive cross-sectional fiscal stress intensity from changes in agricultural tax income and related special subsidies before and after the reform. We also collect detailed data on county-level fiscal and economic outcomes.
We find that a one-percentage-point increase in the degree of fiscal stress induced by the reform increases a county's probability of establishing LGFPs by 0.162 percentage points. The event study result indicates that counties in the treatment and control groups exhibit parallel pre-trends. Our finding survives a full battery of robustness checks: (i) controlling for a flexible time trend varying by a full set of pre-determined county attributes to eliminate potential confounding factors that might generate a non-parallel trend in the outcomes of interest, (ii) using an alternative definition of treatment intensity, (iii) using standard errors clustered at the prefecture level, (iv) controlling for county-specific linear trends; (v) using a subsample without county-level cities, and (vi) controlling for county party secretary fixed effects. We also conduct two placebo tests by utilizing a fake policy time to construct our independent variable and making changes in other types of tax income (e.g., individual income tax and corporate income tax).
Further investigation suggests that our finding is not driven by the Province-Managing-County (PMC) reform, although it does have a significant moderating impact on the probability of establishing LGFPs. We also find that the policy effect varies substantially between counties with different levels of political competition pressure and initial levels of regional fiscal endowment.
This paper contributes to the research on China's LGFPs and provides the first causal evidence for their institutional origin in China's fiscal system. In a broader sense, we contribute to the large body of literature on local governments' strategic responses to fiscal reforms (Han and Kung, 2015; Chen, 2017). There are substantial concerns both inside and outside China about the stability of China's local government debt.
This paper contributes to our understanding of how fiscal reform led to the deeper involvement of China's local governments in the financial system. Our findings yield rich policy implications. In the medium term, the Chinese central government needs to design a more sustainable mechanism to fund local fiscal budgets. One possibility is a property tax levied on real estate assets, as is common in many developed countries. In 2011, China conducted policy trials for levying property tax on second homes in Shanghai and Chongqing. As previously sold land leaseholds gradually reach their maturities, the subsequent land renewal process provides a natural opportunity for local governments to collect additional fees or taxes on real estate properties.

Many countries are considering or have implemented delayed retirement policies because of the increased pressure on pension plans and declining labor supply as a result of aging populations. Raising the retirement age will force people to work longer, and thus older adults will have less leisure time. Consequently, people may reduce their savings due to the postponement of retirement. In other words, their disposable income will increase, which may encourage them to have more children. In addition, if people make decisions about consumption, savings, and childbearing in early adulthood based on their anticipated lifetime income, the increase in future wage income brought about by delayed retirement will increase discounted current income, which may lead families to have more children. Therefore, delayed retirement may increase the fertility rate. An increase in the fertility rate will affect the future labor supply, which will in turn affect the pension replacement rate of retirees and pension benefits after retirement. In addition, delayed retirement will extend the period of pension contributions, which will also affect the pension replacement rate and pension benefits. Delayed retirement can also affect physical and human capital accumulation, thereby affecting wage income, which will in turn affect the pension replacement rate and pension benefits for retirees. How exactly does delayed retirement affect the pension replacement rate and individual pension benefits？ This is a topic of great concern at present. Therefore, it is necessary to study the effects of delayed retirement on the fertility rate, pension replacement rate, and pension benefits.
Based on the OLG model of endogenous fertility, this paper studies the effects of raising the statutory retirement age on the fertility rate, pension replacement rate, and pension benefits after retirement from a micro-economic perspective. It shows that (1) delayed retirement will increase the fertility rate in equilibrium, but the magnitude will be very limited, and that (2) increased fertility will increase the labor supply, improve the pension replacement rate, and increase pension benefits. It will cause these effects by extending the period of pension contributions. At the same time, it will decrease preventive savings, capital accumulation, real wages, and pension benefits. Consequently, delaying the retirement age will increase the pension replacement rate. When the output elasticity of capital is greater than or equal to 0.5, pension benefits will decrease at retirement age. When the output elasticity of capital is less than 0.5, pension benefits will increase at retirement age if the average life expectancy is higher or the proportion of pension contributions is higher; otherwise, they will decrease at retirement age.
Furthermore, this paper extends its model to incorporate human capital. Numerical simulations show that whether individuals' desire for more children is greater than or less than their desire for the quality of children on the balanced growth path, delayed retirement will increase the fertility and pension replacement rate in equilibrium. This conclusion is robust. This study will enrich the research on the effects of delayed retirement on the fertility and pension replacement rates.
This paper analyzes the micro-influence mechanism of delayed retirement on the fertility rate, pension replacement rate, and pension benefits from the perspective of physical and human capital accumulation, which will enrich the literature by providing a micro-foundation for quantitative calculations in related studies. In terms of policy implications, this paper shows that reducing fertility costs can increase the fertility rate. Finally, it proposes some policy measures.
In the next few years, China will progressively implement a policy of raising the retirement age. However, this policy may conflict with the increasing burden of childcare, which will have a major impact on intergenerational time transfer. Future research can study the micro-mechanism of delayed retirement on the fertility rate, pension replacement rate, and pension benefits from the perspective of grandparents' future childcare responsibilities.

In recent years, anti-globalization and nationalist efforts among Western countries have forced governments around the world to constantly adjust their economic and trade policies, which has increased the frequency and extent of governments' economic intervention.This has not only aggravated economic policy uncertainty but also led to deterioration in the global trade environment and uncertain trade prospects.In particular, American economic policies such as large-scale tariff increases and sustained interest rate hikes have meant that Chinese exporters are often unable to predict whether, when, and how destination countries will change their economic policies. As a result, Chinese exporters have to bear a strong exogenous impact of economic policy uncertainty on their export decisions.
The literature on the effects of economic policy uncertainty on export decision-making has mainly emphasized the volume and types of export, rather than export frequency. However, export frequency is an important part of export decision-making, as it can aid export expansion, reduce trade costs, and provide early warning of market fluctuations.Export frequency provides a new perspective for explaining a country's trade growth; it not only helps us to understand the decisions of micro-enterprises in international trade but also to predict the impact of external shocks on China's trade development.Therefore, one must consider export frequency when examining the impact of economic policy uncertainty on export decisions.
This paper uses the Economic Policy Uncertainty (EPU) Index to explore the impact of EPU on firms' trade activities from the perspective of export frequency.Based on the expansion of a stochastic inventory model, it divides the pathways for the effect of EPU on export frequency into trade cost, inventory cost, and market demand fluctuation. Matched data from China's Industrial Enterprise Database and China's Customs Database from 2000 to 2006 were used for an empirical test. The results show that when EPU increases, firms tend to reduce export frequency to control trade cost and avoid potential risks. The results of PSM further show that EPU has an inertial effect in destination countries with a high long-term level of uncertainty, even if there are signs of stability in the short term, firms will not immediately increase export frequency. Second, this paper uses a mediation effect model to examine the pathway sthrough which EPU affects firms' export frequency. It finds that increased EPU in destination countries reduces export frequency by aggravating trade cost, inventory cost, and market demand fluctuations. Of these three,trade cost plays the most important role, accounting for more than 19 percent of the total effect. Finally, by considering the heterogeneity of destination countries, products, and firms, it is found that the export frequency of firms with higher economic development of destination countries and which export intermediate and consumer goods is less affected by EPU.
Therefore, the government and firms should pay more attention to changes in export frequency, and take action to prevent external shock from EPU. China should ensure that its macro policies are transparent, continuous, and stable, which will reduce economic policy uncertainty at the source.In response to the impact of trade cost,government should strengthen relationships with trading partners, to reduce exporting firms' trade and transportation costs. In view of the impact of inventory costs, firms should strengthen their inventory management to reduce the risk of rising inventory costs and depreciation. As for the impact of demand fluctuation,China should investigate potential complementary trade with other countries, look for new patterns of trade growth, and reduce fluctuations in demand.
The contributions of this paper lie in three aspects.First, it theoretically explains and empirically tests three pathways for the influence of EPU on enterprise export frequency: trade cost, inventory cost, and market demand fluctuation. Second, in discussing the impact of EPU on export frequency, it highlights the differences in terms of destination countries, products, and firms, thus supplementing existing research. Third, because firms cannot grasp all of the information, and the expectation for EPU is not completely rational, this paper further examines the dynamic inertial effect in terms of export frequency.

Industrial policies are government policies that promote a certain industry in a country or region and represent government intervention in the economy. Although such policies are widely used, there is no consensus on their economic consequences. On the one hand, industrial policies help to overcome market failure; on the other, the government lacks sufficient information to pick winners, and industrial policies may lead to rent-seeking behavior. The question of how to evaluate the effects of industrial policies on the efficiency of economic resource allocation has attracted widespread theoretical and practical attention.
China's financial system is dominated by indirect finance, and efficient credit allocation is the key to its overall operating efficiency. In practice, there is a close relationship between bank loans and industrial policy: credit policy itself is a part of industrial policy in some circumstances, and other industrial policies often work by encouraging or restricting bank loans. The efficiency of loan contracting reflects the efficiency of credit allocation. For this reason, loan contracting provides a proper perspective for understanding the relationship between industrial policy and the efficiency of economic resource allocation.
We analyze the effect of industrial policy on credit allocation efficiency from the perspective of loan contracting. Loan contract data is manually collected from the notes to the annual reports of listed firms from 2008 to 2015; the data set consists of 13,096 loan contracts from 1,069 listed firms. An industry is defined as supported by industry policy if it belongs to the industries supported by the national Five Year Plan. The major findings are as follows. (1) For listed firms that are in industries supported by national industrial policy, the favorable effect of firm's relationship with the government on loan contracting is greater, and the favorable effect of TFP on loan contracting is smaller. (2) The effect of industrial policy on loan contracting is stronger for state-owned enterprises (SOEs) and for firms located in provinces with higher growth rates for fixed asset investments and weaker legal environments.
Our research contributes to the literature in the following three ways. First, it is the first to investigate the effect of industrial policy on the efficiency of economic resource allocation from the perspective of loan contracting in China. Previous studies have analyzed how industrial policy affects firms' investment and financing behavior, output, innovation, employment, etc. This paper examines how industrial policy affects the relation between firm's relationship with the government and loan contracting. This study also directly examines the effect of industrial policy on credit allocation efficiency, which provides a new perspective for understanding the mechanism through which industrial policy functions. Second, this study provides direct evidence that industrial policy may lead to rent-seeking behavior. Rodrik (2004, 2008) argues that industrial policy often fails due to rent-seeking behavior. Specifically, industrial policy causes economic resources to flow to firms related with the government. We find that industrial policy increases the favorable effect of firms' relationship with the government on loan contracting, which provides direct support for the notion that rent-seeking behavior may result from industrial policy. Third, this paper analyzes credit allocation efficiency from the perspective of loan contracting, which enriches the literature on credit allocation efficiency in China.
Our findings have a number of policy implications. First, the government should take a more prudent attitude toward industrial policy. For industrial policies that are considered necessary, the government should ensure more effective decision-making from the beginning. Second, the government should more closely supervise the implementation of industrial policy to prevent market players from using it for rent-seeking and to reduce the distortion of resource allocation. Third, financial institutions should engage in greater credit management in relation to industrial policy, prevent the abuse of funds, and improve credit allocation efficiency. Fourth, industrial policy should focus on creating a good market environment that supports favored industries.

Understanding the determinants of household consumption is important for understanding the national economy. Scholars try to explain the dilemma of low consumption in certain countries or regions by studying cultural differences, but these studies are restricted by the limitations of data and technology, making the impact of culture on residents' consumption unclear. The mainstream view consists of theories of informal institutions, risk preferences and consumption concepts. These theories explain why culture affects individuals' consumption from different perspectives. As an important aspect of cultural characteristics, collectivism-individualism is an important object of cultural and economic research and worthy of further study.
The best known definition of collectivism is given by Hofstede (1980). He defines a collectivist society as one whose residents enter into a strong and closely connected inner group at birth that provides lifelong security for them. Additionally, the residents should be absolutely loyal to the group. Many scholars point out that this cultural characteristic is also applicable to the study of individuals. Gorodnichenko and Roland (2012) measure the index of collectivism in a culture at the individual level and provide strong support for the quantitative analysis of this paper. The collectivist culture of China is mainly reflected in blood relationships or circles of acquaintances. Stable social networks, social integration and emotional expression are reflected in the close relationships between the members of an inner group and self-control reflects the self-restraint prevalent in collectivist culture. These four dimensions form the core of collectivist culture in this paper. Using a large sample of individual survey data from the China Family Panel Studies (CFPS), we construct a comprehensive index of collectivism to analyze its impact on China's household consumption. The results confirm that the comprehensive collectivism concept has a significant and stable positive effect on consumption in China.
Social networks, social integration and emotional expression have significant positive effects on China's household consumption, but the sense of self-control has the opposite result. The influence of trust, an often used cultural variable, is not significant. Empirical analysis of different types of consumption shows that steady social networks significantly increase different types of consumption. Social integration significantly increases food, education, culture and entertainment consumption. Emotional expression significantly promotes clothing, housing, transportation, communication and other consumption. Self-control ability inhibits expenditures except on clothing and medical insurance. The comprehensive collectivism index has a significant positive effect on all types of consumption. When allowing for heterogeneity in the level of Internet penetration, we find that collectivism has a weaker effect on consumption in areas with greater Internet penetration. The results are still significant when using robust methods to address issues of endogeneity. These conclusions have an important policy implication. To improve the accuracy of policies, the government should pay attention to the effect of collectivism on consumption and the differences caused by regional differences in the informatization level.
This paper makes the following contributions. We measure the concept of collectivism from the perspective of the individual and explore its effect on consumption in China. This study both fills a gap in the literature and provides a new perspective for the interdisciplinary research of economics, sociology and psychology. It is worthwhile to pay attention to the steady positive effect of the family social network on different types of consumption, which proves that the core of collectivism in China is “family collectivism.”

At the G20 Summit in Hangzhou, China, in 2016, China submitted its instrument of ratification of the Paris Agreement to the UN, and made a solemn commitment to the international community to meet its voluntary emission reduction targets, as follows: “China will reach its peak in carbon dioxide emission before 2030 and its intensity of carbon dioxide emission will decrease by 60% to 65% in 2030 compared to that in 2005.” To achieve this goal, the Chinese government has not only dynamically adjusted its energy conservation and emission reduction policies, but also tried to establish a carbon-trading market. However, the development of enterprises entails considerable pollution, and corporate energy projects are characterized by a large investment scale, long cycles, and strong irreversibility; thus the effect of carbon emission reduction policy tools is limited.
Due to constraints on the selection of cases, sample data, and research methods, research is still lacking on how to introduce rational expectation to investment behavior in corporate energy projects. As an important policy tool for the government to realize carbon dioxide emission reductions, China's pilot carbon-trading market offers a concrete natural experimental setting to test whether corporate rational expectations affect energy investment behavior. In late 2011, the Chinese government approved regional pilots for a carbon-trading market in seven provinces and cities by the end of 2013, including Beijing and Shanghai, thus sending an important signal to the market. It means that corporate investment in or operation of high carbon emission projects may increase carbon-permit costs in the future, which may encourage enterprises to adjust investment decisions and operations in relation to high-and low-emission energy projects. At the same time, the power generation industry is not only the largest consumer of energy, especially fossil energy, but also the main source of carbon dioxide and other pollutants.
Therefore, this paper investigates the effect of China's carbon-trading market pilot policy on the investment behavior of power generation projects in China. By dividing power generation investment projects into high-emission and low-emission categories, the installation capacity of power generation technology or the average utilization hours of power generation projects and other physical measures are used to reflect enterprises' actual investment in power generation projects or effective utilization of the investment. On this basis, it is possible to construct a theoretical model of the investment behavior of inter-period enterprise power generation projects. The difference-in-differences method is adopted to empirically test how the government's carbon-permit market pilot policy affects enterprises' application of rational expectations to investment in power generation projects. The results show that companies have rational expectations of the carbon-trading market pilot to be implemented by the government in the future. In the pilot regions, enterprises began to adjust their investment in high-emission and low-emission power generation technology when the government issued the plan, which significantly reduced investment in high-emission power generation projects and increased investment in low-emission power generation projects. In particular, they significantly increased investment in thermal power generation projects with low-emission characteristics.
This study broadens research on the application of rational expectation to energy project investment, and demonstrates the existence of rational expectation in the investment behavior of energy projects. Even more importantly, it indicates that the planning period before the formal implementation of environmental regulation policy by the government will have the expected management effect on the investment behavior of enterprises. By signaling its emission reduction policies to promote enterprises' prior adjustment, the government can better meet its emission reduction commitments.

Since the implementation of the current refinancing system in 2006, its development in practice has been different from originally expected.It is undeniable that refinancing regulation has the power to immediately change the status quo. However, in the long run, the current refinancing system is defective, and means that companies' investment and financing practices are consistently unable to achieve a balance between government regulation and marketization.
This paper attempts to understand whether China's refinancing regulation encourages efficient capital allocation, and to explore how to balance regulation and marketization by answering three questions.Is there market discipline in China's current market？ Has refinancing regulation effectively protected or promoted market discipline？ If not, why not？ As the funds raised by firms are mainly used for investment, this paper focuses on corporate investment. Based on the Modigliani-Miller(MM)investment theory, we take whether investment is constrained by the cost of capital as a measure of the rational investment.
A dynamic panel model and system GMM regression are adopted. First, this paper examines the correlation between investment and cost of capital to determine whether investment decisions conform to the rational criteria of MM investment theory and indicate the existence of market discipline. Second, it examines the effect of refinancing events on the relationship between investment and cost of capital to determine whether regulation can protect market discipline. Finally, it examines the mechanism by which refinancing regulation influences market discipline from two perspectives: refinancing motivation and changes in fundraising direction.
Using the financial statement data, stock trading data, and statement notes of A-share listed companies from 2007 to 2016 in the CSMAR database and Wind database, this study makes the following findings. (1) The investment of listed companies is negatively correlated with the cost of capital, indicating that their investment decisions are in line with the criterion of rationality; thus, market discipline exists in China's market.(2) The constraints on investment after refinancing are weakened, which indicates that the refinancing regulation undermines rather than strengthens the binding effect of the market on corporate investment. (3) There are two defects of refinancing supervision that decrease rational investment: the neglect of pre-refinancing motives and lax regulation of the use of funds. The use of alternative variables, ordinary least squares estimation, propensity score matching, and the differences-in-differences method does not change these results. Further analysis is performed to investigate total factor productivity and share-based payment in asset reorganization to further support the study's findings.
Based on these conclusions, this paper puts forward the following suggestions for improving government regulation and reshaping the refinancing market. The first is to emphasize the concept of cost of capital in regulatory efforts to protect investors. The second is to improve the control parameters for refinancing qualification. The third is to pay more attention to ex-post supervision, and to focus on monitoring listed companies that have just raised funds to reduce waste and the misallocation of funds at the project level.
The main contributions of this paper are as follows. First, the market discipline of cost of capital is emphasized, and more evidence is found to support the MM investment theory. Second, unlike the existing literature, which focuses only on performance or the dividend threshold, this paper embeds government regulation in the market mechanism of investment and cost of capital, providing support for the regulatory limitations and further extending this viewpoint to identify two defects of current refinancing policies. Third, this paper not only makes clear the necessity and limitations of the current regulations, but also provides inspiration to regulators and investors about optimizing refinancing regulation and reshaping corporate refinancing activities.

This paper uses the formal disclosure of stocks as members of the MSCI Emerging Market Index on May 15, 2018 to examine the announcement effect of pilot stocks. We measure the market reaction of the MSCI announcement by the cumulative excess returns in the three-day window around the announcement. We construct two samples: selected firms, which are included in the MSCI list, and matching firms, which are not included in the list but share size and industry characteristics with selected firms. We compare the market reaction of these two samples around the MSCI announcement. The cumulative excess return of selected firms' stocks in the three-day window around the announcement is 1.54% (t-stat=5.21), indicating that the stock price of this group increases significantly around the date of the announcement. In contrast, the cumulative excess return of matching firms' stocks is 0.07% (t-stat=0.18), indicating that there was no significant change in their stock price around the announcement day. The difference in cumulative excess return between the two samples is 1.47% (t-stat=3.06). These findings suggest that the inclusion of A-shares in the MSCI list has a significant positive announcement effect. In the long run, we still observe significant positive market reactions and no significant reversals, indicating a persistent announcement effect of MSCI inclusion.
We then investigate the possible mechanisms underlying these findings. Is the inclusion of the A-share market in MSCI informative？ Specifically, does the positive announcement effect occur because sophisticated investors are more active in trading, as they might gain positive information from the MSCI inclusion？ Or is it simply driven by short-term speculative trading and market sentiment？ Researchers usually propose two hypotheses regarding the positive index effects: the information-driven hypothesis and the demand-driven hypothesis.
First, we perform empirical tests to examine the demand-driven hypothesis. If this hypothesis applies, stocks with closer substitutes may be subject to less price pressure and experience a lower price reaction. We split the pilot stocks into stocks with substitutes and stocks with no substitutes, and compare their price reactions. We find that around the announcement window, the abnormal returns of stocks with close substitutes are substantially higher than those of stocks with no substitutes. At the same time, the matching firms do not exhibit a significant announcement effect. These findings contradict the demand-driven hypothesis but to some extent support the information-driven hypothesis.
Second, we use the three-month window before and after the MSCI announcement to examine whether there is any significant change in analyst ratings, liquidity, or turnover rates for selected stocks. We study the performance of the selected stocks and matching stocks before and after the announcement using a difference-in difference (DID) technique. The change in analyst rating of the selected stocks before and after the announcement, compared with that of the matching stocks, is significantly positive (DID=0.21, t-stat=3.07). It is clear that inclusion in the MSCI means that the underlying stock is more likely to experience an analyst rating upgrade. The liquidity of the selected and matching stocks actually decreases after the announcement, although the liquidity of the underlying stock improves somewhat compared with that of the matching stocks (DID=-0.15%, t-stat=1.72). The turnover of the underlying stock does not change significantly before and after the announcement (DID=0.03, t-stat=1.18). Overall, this indicates that the MSCI announcement has information content and delivers favorable information to the market about the prospects of the underlying stocks.
Furthermore, we show that abnormal margin trading (short selling) increases (decreases) significantly for pilot stocks, while abnormal turnover changes very little. In addition, margin trading has a significantly positive relationship with the announcement effect. As investors eligible for margin trading and short selling are relatively sophisticated, due to the requirements of the China Securities Regulatory Commission, our evidence implies that the announcement effect may be driven by informed trading, in line with the information-driven hypothesis.
Overall, our findings suggest that inclusion in the MSCI conveys favorable information about the firm. In terms of policy implications, we believe that the further opening of the market will encourage informed trading, facilitate price discovery, and improve market efficiency.