After reaching middle-income levels, most developing countries find it challenging to further economically converge to developed countries. This phenomenon is referred to as the “middle-income trap.” Economists have not reached a consensus on the sources of the middle-income trap, nor have they found an effective “prescription.” Long-term cross-country data demonstrate an obvious positive correlation between financial deepening and economic development. However, as financial deepening improves, this positive correlation peters out. Does this indicate that the role played by financial development in promoting economic development also varies？ If so, is it related to systemic differences in industrial structure and patterns of technological progress at different stages of development？ In this study we take a new structural economics perspective, and focus on the effects of financial development (including financial deepening and financial structures) on the upgrading of industrial structures and economic convergence in developing countries at different stages. First, we collect cross-country panel data (1960-2014) on financial and economic development to empirically test the non-linear growth effect of financial deepening at various stages. Second, we construct an endogenous growth model combined with industrial and financial structures for developing countries and investigate the interactions and underlying mechanisms among financial development, industrial upgrading, and economic convergence. The analyses show that there is a “minimum requirement” on the degree of financial deepening for a country that is specific to the country's development stage, and below which it will be difficult to move to the next stage of industrial upgrading. In addition, in terms of economic development, the requirements on the level of financial deepening for industrial upgrading are not static, but initially increase and then slowly decline. This implies that under financial constraints, due to relatively limited capital accumulation, middle-income countries must firstly further improve their levels of financial deepening to effectively support innovative industries. They may otherwise fall into the “imitation trap,” get stuck at the middle-income level, and fail to converge to developed countries. In the processes of financial deepening, industrial structure upgrading, and convergence, developing countries' endogenous optimal financial structures will also undergo dynamic adjustments, i.e., shifting from bank-based indirect financing to market-based direct financing. In the early stages, their property right protection systems and financial supervision systems are incomplete. Banks have an advantage over the financial market in providing credit supervision services, which can to some extent reduce information asymmetry and thus the moral hazard problem and encourage the effective conversion of household savings and idle funds into long-term investments. This in turn promotes financial deepening and facilitates industrial structure upgrading and convergence, which will lead to further improvements in property right protection and in the financial supervision system. However, if a bank's indirect financing is still the main financing channel when the levels of project financing and project risk increase, this will lead to higher supervision costs, thus limit the financing scale and returns of the project. Therefore, in the process of economic development, a country should gradually strengthen its construction and standardization of its financial market, and shift its financial structure to a more balanced or a market-based financial system. This study makes three main contributions. First, we reveal the effect of industrial structure upgrading on financial deepening and how this effect changes with the development stage. Second, based on the perspective of new structural economics, we provide an endogenous growth framework augmented with financial system for analyzing the underlying mechanism and conditions of the middle-income trap. Third, this study demonstrates how a country's optimal financial structure dynamically adjusts in the processes of financial deepening, industrial structure upgrading, and convergence. Thus, from the perspective of new structure economics, we provide a theoretical framework for analyzing the dynamic changes in the relationship between financial and economic development and reveal that overcoming the middle-income trap is a transformation process combining industrial upgrading, financial development, and institutional improvement.

The literature on corporate finance has traditionally categorized studies on firm leverage under capital structure. However, macroeconomists have begun to study the topic of firm leverage since the 2008 global financial crisis. Macroeconomic studies have argued that changes in leverage are related to a contraction or expansion of credit, i.e. the credit cycle, or an additional business cycle overall. Another category of studies have argued that the differences in leverage are tied to structural differences in firm characteristics, including ownership, firm size, and financing constraints. The two types of studies have advanced our understanding of macroeconomic fluctuations, although they have left some gaps in the literature. The first type has argued that changes in credit cycle and firm leverage are causes of economic fluctuations. However, the question remains, what leads to the cyclical fluctuations in leverage？ The second type, in contrast, has failed to explain the observed fluctuations. For instance, they have shown that ownership affects firm leverage, but they have failed to explain the structural and cyclical changes in firm leverage. The motivation of this paper is to examine the fundamental mechanism behind the cyclical changes in firm leverage. This paper focuses on one dominant determinant for the firm's investment, the firm's expectation for the future. The firm's decision to borrow to finance an investment is a risky intertemporal decision. The increase in leverage can significantly raise the return on assets during a boom period, but the decision can lead to great loss in an economic recession. Following this argument, an enterprise's choice of leverage ratio should be pro-cyclical if the expectation of a representative agent in the economy is optimistic in times of economic prosperity (i.e. increasing risk preference) and pessimistic (i.e. decreasing risk preference) in times of economic recession. In this paper, we concentrate on the firm's most direct operating risks, measured by the standard deviation of ROA within the “year*city*2-digit industry” cell. This study uses data from the Industrial Enterprise Database (1998-2013). We find that the firm's operating decisions become more conservative as the firm's operating risks increase, as demonstrated by a decline in leverage. We decompose leverage as a “liability-asset” to show that assets and liabilities both drop in times of rising operating risks. The decrease in liability is larger than that in assets, which leads to a downward slope in leverage. Moreover, we show that the key mechanism is the contraction in investment, suggesting that the process of de-leveraging is equivalent to a decrease in investment. After separating liabilities by long-and short-(current) term liabilities, we find that the decrease in current liabilities is prioritized when firms are dealing with increasing risks. Grouped by ownership, non-state-owned enterprises (non-SOE) are most sensitive to the changes in operating risks, while SOEs are much more stable. These findings may be explained by the differences in their financing capacity, industry characteristics, and operating objectives. This paper makes the following contributions. First, it advances the literature on firm leverage cycles. Studies on credit cycles have focused on the role of financial intermediates as credit suppliers. This paper, in contrast, focuses on the role of credit demand to show the pro-cyclical pattern that exacerbates economic fluctuations. Second, we examine the changes in liabilities based on duration, ownership, and possible mechanism. Third, the firm's decision is used as a framework to examine the leverage cycle, which results in policy implications. Specifically, credit cycle theorists have argued that credit should be eased in an economic recession. However, this study shows that while credit easing may alleviate the liquidity risks in the financial market, it fails to stimulate the real economy if the firms have a negative outlook for the future. It also indicates that monetary easing prior to a recovery in the firm's expectation will divert finances out of the real economy. Furthermore, credit easing does not stabilize the real economy if the high-yielding firms are more conservative. Rather, it may aggravate the problem of adverse selection and financial risks. This paper suggests that a more effective method would be to apply expansionary fiscal policies to stabilize the firms' demand and strengthen their confidence, then apply credit easing as a complementary tool.

The “Overall Plan for the Construction of Hainan Free Trade Port” was officially released in May 2020. In 2025, Hainan will launch independent customs operations, realizing “first-line liberalization, second-line management, and freedom within the island.”Once it becomes an independent customs territory, Hainan's market entities and their commodities, labor services, and financial assets will have offshore legal attributes.The movement and management of people, financial assets, and property will follow the Hainan Free Trade Port Law and its supporting regulations, which are very different from the laws and regulations on the mainland, and will reflect the most advanced and competitive international free port management requirements, particularly in terms of economic activities. Thus, the attributes of the people, financial assets, and property within Hainan's offshore operations must be identified and strict separation from the mainland achieved before the island can be open to trading with the outside world at a high level. Finance is essentially a process of resource allocation. After becoming an independent customs territory, the requirements for the financial operations and services of Hainan will increase. They must effectively serve the economic activities of the free port with its offshore attributes and characteristics, provide matching funds and financial asset transactions and settlements, and effectively control risks. However, in the modern monetary and financial system, most deposit currencies and financial assets are recorded, held, and escrowed in electronic rather than physical form. Defining “first-line” and “second-line” financial assets is therefore challenging and complex, which in turn increases the complexity and difficulty of financial operations and management. We propose that after Hainan becomes an independent customs territory, rational investors will choose to hold and trade their financial assets in accordance with offshore regulations. If large-scale onshore bank deposits and financial assets are held on the island after it becomes an independent territory, the cost of compliance of market entities and the challenges facing the government and financial authorities in performing their duties will increase. The government should therefore support and encourage market entities to gradually convert their bank deposits and financial assets from onshore to offshore. Thus, the operating mode and system construction of commercial banks, and the central bank's currency issuance, clearing arrangements, infrastructure construction, and related supervision and management must be adjusted and transformed accordingly. Bank accounts are used to record and reflect economic and financial activities and are the basis for supervision and tax collection. In terms of fund payments and settlement, specific policies and rules need to be implemented through accounts. After becoming an independent customs territory, the accounts that record the payments, settlements, and balances of Hainan market entities and their management rules must also comply with and reflect the laws and regulations of Hainan Free Trade Port, and functionally meet the requirements for services, support, and the facilitation of offshore economic and financial activities, in addition to facilitating government supervision. However, the operations and the implementation of rules in the existing bank account system in China are unified, and cannot independently record and reflect the property rights of offshore funds and settlement activities for Hainan market entities. In terms of specific supervision and tax collection, it is impossible to distinguish between onshore and offshore assets of a market entity and its related economic activities, or to achieve “second-line management,” let alone “first-line liberalization and island freedom.”The relatively independent free trade account, even if changes are made to its design and function, is not able to provide services and infrastructure support for the economic and financial activities of Hainan Free Trade Port. Thus, we conclude that it is necessary to begin establishing an account system that can support the economic and financial activities of Hainan Free Trade Port, which will be independent of the mainland bank account system, and covers the Central Bank of Hainan, commercial banks, and other related financial institutions. In addition, account rules, supervision and management, financial market construction, central bank currency issuance, and other micro and macro prudential management activities, along with the necessary supporting infrastructure, should be considered.

During recent years protectionism has come to dominate U.S. trade policy. The U.S. has tried to narrow its long-standing large trade deficit and to protect its industries by imposing tariffs on other countries, refusing to support multilateral trading systems, and by other means. Relevant data show that since the collapse of the Bretton Woods system and the establishment of the Jamaican system in the 1970s, the global economic imbalances that are exemplified by the U.S. trade deficit have continued for more than 40 years. Although these imbalances have shown some volatility, in essence they are a set of long-term phenomena. In addition, the U.S. has maintained a long-term trade deficit with almost all of its main trading partners, not just China, and thus the U.S. trade deficit is also a structural phenomenon. In fact, the dollar-standard characteristic of the current international monetary system is one of the root causes of the long-term U.S. trade deficit. The questions explored in this paper are as follows. If the important role of the dollar standard in determining the persistent U.S. trade deficit is taken into account, can the U.S. tariffs draw down the size of the U.S. trade deficit, and how do these tariffs affect the welfare of global residents？ What would happen if other economies retaliated against the U.S.？ In the face of a U.S.-sponsored trade war, could weakening the dollar standard boost the welfare of other economies？ To answer these questions, this paper constructs a two-country dynamic general equilibrium model that incorporates the characteristics of the dollar standard. Based on this model, the paper analyzes the impacts of U.S. tariffs and the trade war on both the U.S. trade deficit and on global welfare, while discussing the relevant transmission mechanism in detail. Under the benchmark model setting, if the U.S. unilaterally imposes an extra 20% tariff, it will reduce the U.S. trade deficit-GDP ratio by about 0.40 percentage points. In addition, the U.S. long-term steady-state GDP will fall by about 2.50%, while the overall GDP of other countries will fall by about 1.10%. U.S. welfare will rise by about 0.60%, and the welfare of other countries will fall by about 1.20%. The unilateral increase in tariffs imposed by the U.S. will curb global trade and production, and worsen the distribution of global welfare through unfair terms of international trade. When other countries take retaliatory measures, that is, when the trade war breaks out, the welfare of other countries will not deteriorate further, but U.S. welfare will fall sharply, and the relative scale of the U.S. trade deficit will not change much. The “prisoner's dilemma” feature of the trade war game can, to a certain extent, explain the occurrence of the trade war. Weakening the dollar standard can help to promote fairness in international trade, which can weaken the negative impacts of the trade war, raise the level of global welfare, and effectively narrow the U.S. trade deficit. This paper offers two main contributions to the existing literature. First, it analyzes the long-term effects that the U.S. tariffs and trade war have on the U.S. trade deficit and on global economic imbalances. This analysis involves constructing a quantitative macroeconomic general equilibrium model, which has been lacking in the existing literature. Second, this paper discusses the impacts of the U.S. tariff and trade war with full consideration for the factor of the dollar standard, which is one important factor that has been neglected in the existing literature. Therefore, this paper's analysis is better aligned with the reality of the world economy than previous studies.

China's economy has progressed from rapid growth to high-quality development, in which it is necessary to strengthen innovation and improve technological progress to achieve an innovation-driven development mode. In 2020, the COVID-19 pandemic increased the global level of uncertainty. In view of the changes to the development environment and China's goal of socialist modernization, the fifth plenary session of the 19th CPC Central Committee emphasized “persisting in the core position of innovation in the socialist modernization of China, and strengthening science and technology as a strategic support for national development.” This stressed the urgency of enhancing the ability to innovate. Innovation requires the support of the financial system. However, as China's financial marketization is still incomplete, the allocation of financial resources may be somewhat distorted and the financial support for enterprise innovation remains insufficient. Thus, we take the perspective of finance-driven technological progress and construct an endogenous growth dynamic stochastic general equilibrium (DSGE) model to analyze the relationship between financial resource allocation, technological progress, and economic growth, and further interpret the underlying dynamic transmission mechanism. We also propose policy suggestions for further financial reform to strengthen innovation and promote high-quality economic development. First, our results show that in the long run, the economic growth rate follows the steady growth level of technological progress, while in the short term economic growth is affected by technological fluctuations. Second, financial resource allocation factors such as equity investment, interest rates, and production investment can affect economic growth by changing the level of production input and technological progress, and we identify a “seesaw” relationship between these two effects. We find the main effect to be through technological progress. The increase of equity investment and the relative tightening of interest rates can promote endogenous economic growth by increasing innovation investment, while an excessive expansion of production investment will crowd out innovation investment and thus inhibit technological progress and economic endogenous growth. Third, as China's technological innovation is counter-cyclical, the following dynamic transmission process of finance, technology, and the economy can be identified. In times of economic expansion, interest rate constraints are relaxed, bank credit and enterprise production increase, and innovation investment is reduced, which will lead to a lower rate of technological and economic growth. Conversely, in times of economic contraction, interest rate constraints are imposed and enterprises will reduce production while innovation investment increases, which will promote technological and economic growth. The policy implications of the study are first that the new contradictions and challenges require new development patterns and opportunities. Further financial reforms should be implemented, the allocation mechanisms for financial resources should be optimized, and the capital market, particularly the equity market, should be used to support innovation. In addition, sound and moderate macro-control policies should be implemented to provide a benign macro environment for enterprise innovation and innovation demand, which can then lead to technological progress and high-quality economic development. We design a novel DSGE model to examine the endogenous growth of finance-driven technological progress, which reveals the mechanism through which commercial banks and equity markets can support the activities of production and innovation. This addresses the deficiencies of other DSGE models of endogenous technological progress, as we identify an allocation mechanism for financial resources. In terms of financial support for production and innovation investment, we simulate the mechanism through which financial resource allocation affects economic growth by changing the production input and the level of technological progress, thus providing a new analytical perspective. In addition, based on our analysis of the impact of financial resource allocation on technological progress and economic growth, we interpret the transmission mechanism underlying finance, technological, and economic development, which extends the current research on their relationships and provides policy guidance.

Stabilizing inflation expectations is a prerequisite for the effective implementation of monetary policy. Scientifically measuring inflation expectations and analyzing the influencing factors are fundamental to the effective management of the macroeconomy and financial markets for investors, entrepreneurs, and policy makers. Both domestic and international economic and policy environments have recently changed drastically, particularly due to the 2020 COVID-19 pandemic, which is ongoing at the time of writing. A balance must be struck between the prevention and control of the pandemic and the development of the domestic economy. Inflation components such as industrial product prices and food prices have become structurally differentiated. Thus, accurately capturing the degree of inflation expectations and their changes attracts extensive attention from market investors and policy makers. Chinese scholars take two main approaches to exploring the nature, management, and determinants of inflation expectations. The first approach is to extract information on inflation expectations from modeling yield data and the actual inflation rate, but this ignores the influence of many macro factors and the underlying mechanisms. Quarterly frequency data can also be considered, but this approach is limited by the availability of low-frequency macro data. To utilize data more efficiently, we construct a mixed frequency no-arbitrage Nelson-Siegel (NS) extended model that jointly models the yield factors and macro variables of different frequencies under theoretical consistency, decomposing information on inflation expectations with various maturities from the Treasury yield curve. Our study makes two main novel contributions to the literature. First, we theoretically derive a mixed frequency no-arbitrage NS extended model containing GDP growth and other macro variables. The model has the characteristics of theoretical consistency and information efficiency. Under the theoretical constraint of consistent pricing of bonds of different maturities, we extract the term structure of inflation expectations, which can well reflect the level of and changes in inflation in China from the bond market and macro-financial variables with different frequencies. Second, in terms of application, we construct a framework for analyzing the factors affecting the term structure of inflation expectations. Unlike the traditional no-arbitrage model, our model guarantees the consistency of theoretical pricing through no-arbitrage conditions in combination with the simplicity of the traditional NS model. We also use the Markov chain Monte Carlo Gibbs sampling method for parameter estimation, and the results are relatively stable, with a good fit for the yield curve. In addition, the model considers and estimates mixed frequency data and effectively utilizes information from quarterly data at a monthly frequency, which overcomes the double defects of sample information loss and time delay encountered when analyzing quarterly data. In light of previous research, our macro variables include various important macroeconomic indicators with both monthly and quarterly frequencies, which may affect inflation expectations. We model these macro variables jointly with the Treasury yield curve. The sample period is from April 2006 to February 2020, with data obtained from the Wind Database. The key empirical results of this paper are as follows. First, the model fits the yield curve of Treasury bonds well. Second, the model infers a reasonable expected term structure of inflation, which is consistent with the Lang-Run forecast at quarterly frequencies. The agreement between the model's implied expectations and the survey data is greater after 2012, indicating that the model can extract more accurate macro information from the financial market as China's bond market gradually develops and improves. Third, our analysis of factors affecting inflation expectations shows that 1) the level of inflation expectations is mainly determined by the money supply growth rate, inflation rate, and global food price changes; 2) the short-to medium-term inflation expectation significantly responds to various macroeconomic variables; and 3) yield factors contribute most of the variance in future mid-to long-term inflation expectations, indicating that future inflation uncertainty is reflected in bond pricing.

Pollution prevention and control are one of the “Three Tough Battles” China faces during this decisive period, in which it is aiming to build a moderately prosperous society in all respects. A good environment improves the livelihoods of all its citizens. Achieving both emission reduction and social welfare in the process of coordinated regional development has become a major practical problem in China's strategy of green and high-quality development. We build a spatial economic model that includes two sectors, two regions, and a single element. We discuss the environmental and social welfare effects of regional integration, and attempt to identify the related theoretical mechanisms. Based on data on 30 provincial administrative regions in China from 1995 to 2016, we use the dynamic spatial dubin model and the generalized spatial two-stage least squares model to verify the impact of regional integration on pollution and social welfare. Our findings are as follows. (1) Regional integration has different effects on different types of pollutants. It significantly reduces the emission of local pollutants, but increases global pollutant emissions. (2) We identify an inverted U shaped relationship between regional integration and social welfare. Regional integration is conducive to improving social welfare up to a specific level, and currently the level of provincial integration in China is at the stage of promoting social welfare. (3) The impact of regional integration on environmental pollution and social welfare has regional variations. (4) The impact of regional integration on pollution and social welfare has significant spatial boundaries. The contributions of this paper are as follows. First, we address the lack of theoretical research by constructing a spatial economic theory model, identifying the relationship between regional integration, environmental pollution, and social welfare through normative theoretical derivation. Second, by dividing environmental pollution into the two types of local and global pollutants, our research conclusions are more focused. Third, we confirm the differences in the impact of regional integration on different types of pollutants and identify an inverted U shaped relationship between regional integration and social welfare. Finally, we consider the spatial spillover effects of pollution and social welfare and the regional interactions, and identify the spatial boundaries within which regional integration affects environmental pollution and social welfare. This provides a quantitative basis for a more complete appreciation of the dual dividends of emission reduction and social welfare enhancement, which can be achieved through regional integration by improving space management. This research also has important policy implications. First, we suggest that environmental policies should be formulated specifically for different types of pollution and should fully consider the dividends that can be gained from both emission reduction and social welfare enhancement through regional integration, by improving space management. In the process of regional integration, environmental protection standards should be gradually unified to reduce the sensitivity of enterprises to regulatory differences and avoid the transfer of pollution across regions. In addition to setting strict environmental protection standards for local pollutants such as industrial dust, policies for global pollutants such as carbon dioxide should also be formulated. An inter-regional source accounting system to clarify the specific responsibilities of region for the treatment of transboundary pollution should be established, to reduce the negative incentives local governments may have in terms of the treatment of transboundary pollution. Second, emission reduction and social welfare enhancement can be synergistically realized in regional integration through improving space management. Both can be improved up to a specific critical level. The spatial scope of regional integration policies should also be planned and managed. The spatial scope of China's domestic regional integration is currently within the critical level. There is a huge potential for China to use regional integration to promote emission reduction and increase social welfare. Finally, the market mechanism should be fully exploited in the process of regional integration, as this can increase the participation of micro-enterprises and further help to achieve emission reduction and social welfare enhancement. Solving pollution problems through market mechanisms within regional integration can also promote energy conservation and thus further emission reduction. Marketization should therefore be the main strategy for pollution control in the future.

Research on the impact of labor market factors on the real economy is currently increasing in the fields of economics and corporate finance, and innovation is currently the driving force of China's economic development. The effect on innovation of the minimum wage, an important labor policy, is not adequately examined in the literature, and thus investigating the relationship between the minimum wage and enterprise innovation has both practical and theoretical significance. The minimum wage may discourage innovation, as rising labor costs can lead to enterprises' shutting down or exiting the local market. The cost pressure from an increase in the minimum wage may also result in fewer non-wage benefits, such as enterprise training investment, which can reduce or weaken employees' sense of belonging to an enterprise and thus reduce their level of innovation. However, the minimum wage can also promote innovation, as the increasing labor costs can lead to a decline in profits, which can encourage enterprises to adopt advanced technologies to replace expensive labor. This can be viewed as labor-induced technological progress. An increase in the minimum wage can also force out low-skilled workers and improve the overall human capital of a business, thus promoting innovation. Using patent data and data on listed companies from 2006 to 2014, we examine the impact of municipal minimum wages on innovation, and find a positive effect. Through adjacent sample analysis, a double difference strategy, and a series of other robustness tests, we find that the significant positive relationship between minimum wage and innovation is generally stable. The minimum wage improves the material capital of enterprises, reduces the number of low-skilled workers, increases the number of high-skilled workers, and helps to optimize human capital, thus providing both the hardware and software conditions for innovation. Enterprises can achieve innovation through self-innovation and technology introduction. The minimum wage also improves the innovation efficiency of enterprises. Further analyses indicate that the minimum wage improves an enterprise's factor structure and total factor productivity. Heterogeneity analysis shows that the minimum wage has a more obvious influence on the innovation of more labor-intensive enterprises, those with lower average wages, those with higher levels of industry competition, and those in high-(vs. low-) marketization regions. Our study has theoretical value as we analyze the influence of institutional factors (minimum wage) on micro-enterprise innovation, rather than labor factors at the company level, which is the main focus of other studies of labor cost and innovation. The capital-skill complementary theory has rarely been applied in studies of the effects of minimum wage, but we systematically examine its varying effects on the demand for high-skilled and low-skilled labor, thus overcoming the drawbacks of a homogenous analysis of labor demand. By applying this theory we find that the minimum wage leads to low-skilled workers' losing their jobs, indicating that it can harm the interests of such workers and is therefore not an act of labor protection in a general sense. This study also provides new policy implications. Our finding that the minimum wage leads to a decline in the employment of low-skilled labor indicates that although such policies can promote enterprise innovation and development, at least some employees will suffer. Laid off workers should therefore be actively re-employed in all regions implementing minimum wage policies. We also identify enterprises with self-created technology and those with imported technology in the market. These two types of innovation should be recognized in innovation-driven development strategies. Policymakers should provide distinct innovation incentives to the two groups of companies, giving priority to supporting enterprises that create their own technologies while also considering those that use external technologies.

The role of finance is central to the modern economy, as the interaction between finance and the real economy is prominent. The healthy development of China's economy requires allowing finance to serve the real economy. The prevention of “risk resonance” between China's financial market and its real economy will ensure that the co-development of finance and the real economy is benign. This study on the interaction between financial risk and the real economy will demonstrate how to prevent “risk resonance” and improve the financial services to the real economy. This paper uses a method proposed by Diebold and Yilmaz (2009) to calculate the industry yield spillover index of the stock market. which is called “Industry Risk of the Stock Market.” It analyzes the linkage relationship and risk spillover effect between various industries in the stock market. The dividend yield and interest rate are applied as intermediary channels. This allows us to use the GARCH-in-mean model to analyze the transmission mechanism of the first and second moments between the industry risk of the stock market and macroeconomic variables. The model measures the interaction between the stock market and the macro economy from a new perspective. It also describes the two-way transmission of industry risk between the stock market and macroeconomic fluctuations, filling a gap in the literature by demonstrating how stock market fluctuations affect macroeconomic performance. This paper studies the risk spillover effect among various industries in the stock market. A total of 3,284 stock samples are selected from China's Shanghai and Shenzhen A-share markets. A total of 18 industries are selected, following the industry classification standards of the China Securities Regulatory Commission in 2012. The sample period is from May 10, 1996 to December 31, 2019. Economic indicators such as consumer price index, broad money supply, export value, fixed asset investment completion, unemployment rate, and RMB exchange rate against the US dollar are used as representatives of the macroeconomic performance. All data are obtained from the WIND database. The main findings are as follows. First, the results of examining the spillover effect of the return of the stock market industry in China show that compared with the consolidation cycle, the stock market has a relatively large industry-wide yield spillover index during the rising cycle and falling cycle. The manufacturing industry, as the foundation of national economy, is at the forefront of all industries in terms of its total outgoing spillover effect, while the financial industry as a whole is the recipient of incoming spillover. Second, there is a significant two-way impact between the industrial risk of the stock market and the macro economy, whether at the mean level or the volatility level. Macroeconomic fluctuations will lead to stronger correlations between various sectors in the stock market, and the yields of various industries can rise and fall at the same time. The fluctuation of the industrial risk of the stock market generally inhibits the growth of the macro economy. In terms of the impact of industrial risks on macroeconomic variables, both dividend rate and interest rate are intermediary channels. Conversely, regarding the impact of macroeconomic variables on industrial risks, only interest rate is an intermediary channel. In addition, during the period of external shocks, represented by the international financial crisis in 2008, the industrial risks and macroeconomic variables do not show a significant spillover relationship. This study's findings offer some policy recommendations. Firstly, regulators can use quantitative indicators such as the industrial spillover index to measure the industrial risk of the stock market. Secondly, the effective prevention of two-way contagion between financial risks and fluctuations of the real economy and of “risk resonance” between the financial market and real economy requires stronger macro-prudential supervision. Accurately identifying the source of risks is helpful to regulators who will be able to implement better risk supervision measures after accurately identifying the source of the risks. By analyzing the characteristics of the industrial risk of stock market, we can accurately identify its source and accurately implement measures to prevent and control financial risks at the relevant industry level. Third, regulators should consider the intermediary objectives of financial risk supervision to improve the financial market and real economy's ability to supervise and prevent risk resonance. The regulators should not ignore the other aspect when unilaterally implementing policies from the perspective of the financial market or real economy.

To improve china the connections between the capital markets of mainland China and Hong Kong China, the Shanghai-Hong Kong Stock Connect (SH-HKSC) was launched in November 2014 and the Shenzhen-Hong Kong Stock Connect (SZ-HKSC) in December 2016, enabling investors in the mainland and Hong Kong to mutually trade eligible stocks. SH-HKSC and SZ-HKSC attract much attention from investors and scholars. Their effects on spillovers, market risks, the A-H share premium, pricing efficiency, and corporate behavior are investigated. However, few studies examine the impact of SH-HKSC and SZ-HKSC on the cost of equity, which is the focus of this paper. Traditional wisdom suggests that stock market liberalization may reduce the cost of equity in the domestic market because of risk-sharing or increased liquidity. However, this does not consider the impact of information heterogeneity among domestic and foreign investors, which may restrict the application of such liberalization in China. Compared with more developed capital markets, the mainland market has a larger proportion of retail investors, while the Hong Kong market is dominated by institutional investors. Research shows that institutional investors in Hong Kong have information advantages over retail investors in mainland (Chen and Huang, 2019; Lian et al., 2019; Zhong et al., 2018; Zhong and Lu, 2018). Thus, an influx of Hong Kong institutional investors will dramatically change the information structure and intensify the competition between informed and uninformed investors in the mainland market. We draw on these observations to examine the effects of SH-HKSC and SZ-HKSC on the cost of equity, and divide them into a “competition channel” and an “information channel”. The competition channel can reduce the cost of equity in three ways. First, in terms of risk sharing, the potential for diversification will stimulate foreign investors to purchase domestic stocks and reduce the cost of equity. Second, increased capital inflows can increase market liquidity and reduce the liquidity premium. Finally, an increase in competition can enhance price informativeness and reduce the risk of information asymmetry. The information channel can have two opposite effects on the cost of equity. The informed trading of Hong Kong investors helps to transfer private information to the stock price, which on average increases the precision of information possessed by investors and reduces the cost of equity. However, the increased information asymmetry caused by the influx of informed traders may also increase the cost of equity. The degree of this effect depends on the level of investor competition. To empirically test the overall effects of SH-HKSC and SZ-HKSC on the cost of equity, we use residual income models (GLS, CT, OJ, PEG, and MPEG models) to estimate the cost of equity and conduct a difference-in-differences analysis. We find that due to policy risks and the unstable market environment, SH-HKSC has no significant reduction effect on the cost of equity until the second year after its implementation. SZ-HKSC, which draws on the operating experience of SH-HKSC, demonstrates an immediate, strong, and significant reduction effect on the cost of equity. We further analyze subsamples and find evidence of the competition and information channels. We find that SZ-HKSC significantly reduces the cost of equity of stocks with a relatively high degree of investor competition or with relatively high quality public information, but for those with less competition or higher information asymmetry, the cost is not affected. This study makes three main contributions to the literature. First, it fills a research gap by examining how SH-HKSC and SZ-HKSC affect the cost of equity in the mainland market. Second, it extends research on capital market liberalization by systematically analyzing its effects on the cost of equity through the two channels of competition and information. Third, the empirical results provide new evidence of the theoretical relationship between information asymmetry and the cost of equity in markets with imperfect competition.

Chinese enterprises rely on mergers and acquisitions (M&A) to optimize industrial layouts and upgrade industrial structures, and how to prevent the valuation and pricing risk of benchmark assets is the core issue during M&A. Performance commitment is a protection mechanism that guarantees the future expected return of the underlying assets, alleviates the acquirer's worry about the future profitability of the underlying assets, and reduces the pricing risk in the M&A transaction. However, the capital market questions the real effect of performance commitments because they have a high default rate. Performance commitments raise the valuation of the underlying assets, helping the asset's seller obtain excess returns. They also provide the market with strong expected performance information about the underlying assets, which drives up the stock price of the asset purchaser's secondary market. The acquirer's major shareholders and institutional investors use the rise in the secondary market as an opportunity to obtain large profits by means of a pledge or reduction of shares at the expense of small investors. Therefore, M&A performance commitments do not protect the interests of listed companies and small investors, considering their high default rate. The original intention behind a performance commitment is that it will alleviate information asymmetry and protect the investors' rights and interests. Instead, performance commitments work against the listed companies and small investors' interests by creating gimmick-like market value speculation. The literature has focused on performance commitment's internal mechanisms, the relationship between performance commitment and M&A risk, and the incentive effect. However, the studies have not considered how performance commitment's external signal affect M&A stakeholders or whether the signal is used maliciously for hype. The latter may cause a wealth transfer effect, which harms small investors. Nor have studies shown whether performance commitments are intentionally used to alleviate information asymmetry. Therefore, this paper studies the role of wealth transfer and signal transmission in the decision-making behavior of different types of investors. This study is an important supplement to the literature because it systematically interprets the performance commitment mechanism. In answering this paper's thesis, we found that small investors buy more of an acquirer's shares, while large investors are motivated by timed trading to sell significant amounts of stock. In terms of investment income, small investors suffer a great loss, while large investors gain. We found a significant wealth transfer effect between the large and small investors under a performance commitment. Research has indicated that the market's interpretation of performance commitment has changed. Capital market investors are concerned about the increase in performance commitment defaults. The performance commitment's success as a protection mechanism depends on the acquirer's integrity and dedication to the commitment. Therefore, this paper attempts to answer the following question: can high information transparency and stronger protections for investors weaken the performance commitment's wealth transfer effect？ Our research shows that M&A companies with high information transparency and stronger protections for investors are better at suppressing the wealth transfer effect, and the information advantage and informed trading behavior of large investors converge. China's financial regulatory institutions have cracked down on fraud and ensured that listed companies have provided true, accurate, complete, and timely information disclosures. The environment now allows us to examine the following question: what role do performance commitments play in M&A when the market's inertia for performance commitments and the subsequent large-scale breach of contracts occur simultaneously, and what would make the mechanism more effective？ The performance commitment is the central research problem of the current financial supervision environment. Studies on the role of wealth transfers and signal transmissions in performance commitments will show the best method of supervision for performance commitments and the best punishment mechanism for asset restructuring. The findings will help regulators determine targeted measures to improve the effect of performance commitments.