On the occasion of the centenary of the founding of the Communist Party of China (CPC), the building of a moderately prosperous society in all respects for the benefit of more than 1.4 billion people is not only a solemn commitment made by China's party to its people and history but also a key step in realizing the Chinese dream of the great rejuvenation of the Chinese nation. This study focuses on the statistical monitoring and analysis of the core contents of the Tsinghua China Balanced Development Index during the building of a moderately prosperous society in all respects since the 18th CPC National Congress. These contents include data relating to economic development, social governance, cultural construction, poverty alleviation, the people's livelihoods, and the ecological environment. The results comprehensively reflect China's great achievements. Further to this study's use of the monitoring results to examine the country's new journey, it analyzes the problems and challenges presented by the comprehensive construction of a modern socialist country. Based on our results, this study suggests countermeasures to address the main contradictions affecting China's society in the new era and help start its new journey toward the comprehensive construction of a modern socialist country.
The construction of the China Balanced Development Index is based on the principal contradictions affecting Chinese society in the new era. The index links the need to improve people's lives with imbalances and inadequacies in the country's development and meets the requirements for a comprehensive system to monitor the country's progress in building a moderately prosperous society in all respects. First, the China Balanced Development Index measures comprehensive criteria for the improvement of people's lives, which cover four areas: economic development, social progress, the ecological environment, and people's well-being. Second, based on the idea of no one being left behind on the path to a prosperous society benefiting all people, the China Balanced Development Index embodies the whole population and uses the Poverty Incidence Rate indicator to measure the progress of poverty alleviation in different regions. Thirdly, the construction of the China Balanced Development Index embodies all regions, fully addressing the problems of development imbalances between different regions and between urban and rural areas.
Our results show historic achievements in building a moderately prosperous society in all respects since the beginning of the new era: economic development continues to advance, the level of social governance continues to improve, cultural soft power is becoming increasingly prominent, poverty is successfully alleviated, people's living standards are significantly enhanced, and the ecological environment is improving markedly.
Based on our analysis of the data from the China Balanced Development Index, this study finds the following problems and challenges: regional differences need to be further narrowed, the imbalance between urban and rural development remains prominent, the ability to innovate does not meet the requirements of high-quality development, imbalances and inadequacies in the people's disposable incomes remain prominent, the equalization of basic public services needs to be further ameliorated, and governance of the ecological environment needs to be further improved.
This study suggests some potential solutions to the above problems. First, adhering to the strategy of promoting major regional development and building a new pattern of regional coordinated development. Second, vigorously implementing China's rural revitalization strategy and promoting the integrated development of the country's urban and rural areas. Third, strengthening the construction of technological innovation and diffusion systems and continuously improving the national innovation capability. Fourth, ameliorating the income distribution policy to further narrow the income distribution gap. Fifth, making deeper pension, medical care, and education reforms, while promoting the equalization of basic public services. Finally, further modernizing the governance of the ecological environment to achieve sustainable development.

The cross-country co-movement of financial conditions is a notable feature of the development of global financial integration. This phenomenon, called the global financial cycle, can be interpreted as a set of push factors, including US monetary policy and global risk aversion. If a country's capital flows are mainly driven by the global financial cycle, the country is more likely to experience sudden surges and stops in capital inflows that are not related to domestic fundamentals. In addition to amplifying the fluctuations of a country's capital flows and financial cycle, the global financial cycle may also increase the volatility of a country's economic cycle if the global financial cycle is not aligned with a country's specific macroeconomic conditions. For example, if a loose global financial condition coincides with a country's economic prosperity, this may lead to excess capital inflows into the country, which in turn leads to asset price bubbles and excess credit creation. Asset price bubbles and excessive credit growth are the best predictors of financial crises.
Understanding the impact of the global financial cycle on cross-border capital flows is particularly important given the current complex international situation. Previous studies show that in periods of stress, capital flows are mainly driven by global factors. For example, the COVID-19 pandemic has led to unprecedented capital outflows from emerging markets, mainly because of the sharp increase in global risk aversion and uncertainty. Although many emerging economies have experienced outflows during the COVID-19 pandemic, some have been much more affected than others. So how can we explain this heterogeneity？ Could macroeconomic fundamentals and structural factors explain it？ The global financial cycle is an uncontrollable exogenous shock to a country, but a country can enact policies to adjust fundamentals and structural factors. Therefore, answering the above questions could help to improve policies for capital flows management.
First, this study uses principal component analysis to generate a global factor (GF) variable, extracted from 42 major stock market indexes, as a proxy for the global financial cycle. Second, the study examines the impact of the global financial cycle on capital inflows during the 1997-2017 period. We find three main patterns. (1) An increase in GF reduces capital inflows significantly, and this impact exists for all of the sub-items of capital inflows, namely foreign direct investment, portfolio equity, portfolio debt, and banking loans. (2) In the 2008 global financial crisis, the portfolio inflows (including equity and debt) of emerging economies became more sensitive to the global financial cycle. However, due to the safe-haven effect, the portfolio inflows of advanced economies were less sensitive to the global financial cycle. In both advanced economies and emerging market economies, banking loans were extremely sensitive to the global financial cycle, which confirms the importance of cross-border banks during periods of global financial market volatility. (3) In the post-2008 financial crisis period, portfolio debt inflows are more sensitive to the global financial cycle than in the pre-crisis period.
Third, we explore why the global financial cycle affects the capital flows of countries unequally. We make the following conclusions. (1) When a country is in a period of economic prosperity (with relatively high economic growth and interest rates), the impact of the global financial cycle on capital inflows is relatively weak. (2) When a country has a high level of capital account liberalization or financial development, the impact of the global financial cycle on capital inflows is relatively strong. (3) The effect of the global financial cycle is stronger in fixed exchange rate regimes than in more flexible (although not necessarily fully flexible) regimes.
Finally, using a mediation effect model, we find that US monetary policy shock is an important driver of the global financial cycle, which affects cross-border capital inflows.
Policy makers could respond to the global financial cycle in the following ways. First, they could strengthen the monitoring and analysis of cross-border capital flows. Policy makers must not only pay attention to the scale of cross-border capital flows but also to the structure of the capital flows. Bank loans and debt flows have a greater effect on financial stability and have to be monitored carefully.
Second, sound macroeconomic fundamentals and reasonable institutions can help a country absorb external shocks. Specifically, countries should (1) adopt sustainable and stabilizing macroeconomic policies that enhance economic and market resilience; (2) open up capital accounts gradually and impose capital controls when necessary; and (3) improve the flexibility of exchange rates, although they do not need to be fully flexible.

The expansion of imports is one of the key determinants leading to changes in China's economic growth patterns and influencing China's development of macro-and micro-policies. Due to a series of import-promoting policies, the value of China's 2018 imports was $2.14 trillion, exceeding the value of 2001 imports by 8.77 times. However, China faces profound changes in the international environment. For example, U.S. trade protectionism affects the production and operation of Chinese enterprises. To safeguard the World Trade Organization (WTO) regime and China's legitimate rights and interests, China imposes retaliatory tariffs on U.S. products. It is still unknown whether U.S. exports to China are significantly decreased by the shock of retaliatory tariffs, and whether China's total imports and domestic production chains are affected by the tariff shock. Discussion of the above issues not only helps China deal with the complexities of U.S. protectionism, but it also provides important theoretical guidance for further relaxation of import restrictions.
In this paper, we use the multiple-period difference-in-differences method to investigate the effects of Chinese retaliatory tariffs on U.S. products. First, we discuss the effects on imports from the U.S. The identified effects satisfy statistical robustness conditions, including the parallel trend test and the placebo test. Second, we explore the effects of retaliatory tariffs on total imports from all over the world, including the diversion of import origins from the U.S. to other countries. Third, we explain the impacts of tariff shocks from the perspective of upstream and downstream connections. Furthermore, we include heterogeneity analyses regarding import demand elasticity, technology complexity, and enterprise ownership.
Our monthly trading data from January 2017 to June 2020 are provided by the China General Administration of Customs. As enterprise names and ID codes are not included in the dataset, we aggregate the transaction data into imports at the HS8 product level. The data regarding China's additional import tariffs on U.S. products come from the official website of the Ministry of Finance of China. These data include the list of HS8 products that are subject to additional tariffs, the list's date of publication, and the effective dates of the additional tariffs. The data regarding the U.S. additional import tariffs on Chinese products come from the website of the Office of the United States Trade Representative. We match the Chinese HS8 product codes with both the U.S. product codes and the Chinese industry codes of input-output table.
First, we find that China's retaliatory tariffs on U.S. products initially cause a significant decrease in the total value and quantity of imports from the U.S. However, the decline in imports becomes less rapid after implementation of the tariff exclusion list. Second, China's total imports and domestic production chains are not significantly affected, meaning that the negative effects of retaliatory tariffs are generally controllable. China's imports from the U.S. are replaced by imports from larger trade partners, with the support of Chinese most-favored-nation (MFN) tariff reductions. Third, although China imports of flexible products, non-fuel primary products, high-tech products, and private enterprises from U.S.are affected by the retaliatory tariffs against the U.S., the total imports of these products and enterprises are not significantly affected. Therefore, China's overall trade environment remains stable and positive.
Our conclusions have important policy implications. First, China's retaliatory tariffs cause precise and powerful local impacts on U.S. exports, and thereby encourage the U.S. to abide by the applicable WTO rules. Second, it is necessary to mitigate the negative impacts of retaliatory tariffs through supporting government actions, such as accelerating the release of tariff exclusion lists and using tax incentives, subsidies, and financial supports to decrease the costs of intermediate inputs.
We contribute to the literature on three grounds. First, compared to the numerical simulation data used in most of the literature, we use actual data from China's imports and lists of products subject to retaliatory tariffs. Second, we discuss the effects of retaliatory tariffs on imports from the U.S. and the rest of the world, and our consideration of import diversion helps explain the local and overall effects of the tariffs. Third, we investigate the effects of upstream and downstream tariff shocks and include heterogeneity analyses across different industries and enterprises.
In the long term, trade frictions between China and the U.S. will impact the stability of China's industrial production chain, its industrial transformation, and the upgrading and innovation of Chinese enterprises. These topics will need to be further explored in future research.

In 2004, China's Ministry of Labor and Social Security implemented minimum wage regulations that extended the minimum wage system to all parts of the country. This significantly has increased the labor costs of firms and gradually removed the low-cost dividends that processing trade firms have traditionally enjoyed. In recent years, the transformation and upgrading of processing trade has become a focus issue, and the report of the 17th National Congress of the Communist Party of China clearly states that the transformation of the growth mode of foreign trade must be accelerated based on quality, the import and export structure must be adjusted, and the transformation and upgrading of processing trade must be increased. Therefore, it is theoretically and practically valuable to study the scale change, transformation, and upgrading of China's processing trade from the perspective of increases in minimum wage and labor costs.
To this end, this paper performs a difference-in-differences analysis of the effects of labor cost or minimum wage increases on the scale and upgrading of processing trade based on the micro data of Chinese firms from 2000 to 2013 and by treating the promulgation of China's minimum wage regulation as a quasi-natural experiment. This leads to three main findings. First, although labor cost increases significantly reduce the scale of processing trade, they promote the transformation and upgrading of processing trade firms via a backpressure mechanism. Second, mechanism tests show that labor cost increases encourage processing firms to increase their fixed investments, increase on-the-job training and research and development expenditures, and improve production efficiency, which collectively promote the development of processing firms. Third, a study of the relationship between labor cost, resource allocation, and the upgrading of processing trade at the urban level reveals that improvements in the efficiency of export market-share allocation is a key channel via which labor cost increases stimulate increases in urban processing trade.
This study has important policy implications. For a long time, cheap labor costs have underpinned the rapid development of China's processing trade. However, China's processing trade is typically characterized by large quantity and low quality, and it often lacks its own brand and core technology. In addition, most companies involved in processing trade are original equipment manufacturers rather than finished item manufacturers, and export expansion is mainly supported by a large number of low value-added primary processing products. This paper finds that although labor cost increases do not contribute to the expansion of processing trade scale, the backward force mechanism significantly promotes the upgrading of firm processing trade and improves the efficiency of resource reallocation, which promotes the upgrading of urban processing trade. This shows that China may slightly increase the minimum wage standard and improve the wage security system to encourage processing trade firms to reduce or abandon their excessive dependence on low-cost labor strategies, and to strengthen research and development innovation and improve efficiency to avoid the low technology trap. These measures will promote the transformation and upgrading of processing trade firms and ultimately enhance their position in the global value chain and capture value-added export opportunities.
The main contributions of this paper are as follows. First, this paper may be the first to systematically and comprehensively examine the effect of the minimum wage system and labor cost increases on China's processing trade. The findings of this paper therefore enrich the literature on the economic effects of minimum wage law. Second, in the context of the open economy and the global value chain, this paper devises a comprehensive index and evaluation system for studying the transformation and upgrading of processing trade, and thoroughly probes the transmission mechanism underlying the transformation and upgrading of processing trade driven by labor-cost increases. Third, this paper investigates the micro-level effects of labor cost increases on the upgrading of firms' processing trade and the macro-level effects of these increases on the transformation and upgrading of urban processing trade. It thus enriches the literature on the reallocation of resources that occurs in response to increases in the minimum wage or labor costs.

The fundamental purpose of the financial sector is to serve the real economy. Currently, China's economic development is characterized by a “cold” real economy and a “hot” virtual economy. The financial sector is favored by social elites, while the real sector exhibits a sluggish trend. The mainstream explanation for this disconnect is that human capital has been overallocated to the financial sector, stifling innovation in the real sector and thus leading to a decline in real economic growth. However, given the information asymmetry between creditors and borrowers, increasing human capital in the financial sector also helps eliminate credit contract frictions,and result in credit expansion, which promotes real economic growth. To provide theoretical and practical reference for deepening financial supply-side structural reform and realizing an innovation-driven growth regime, this paper investigates how the allocation of human capital between the financial and real sectors affects real economic growth in China.
In theory, the financial sector's human capital has ambiguous effects on real economic growth. On the one hand, it hinders real economic growth through the following channels: (i) crowding out labor and capital in the real sector; (ii) transferring profit from the real sector, weakening entrepreneurship, and reducing the intrinsic incentives of productive activities; and (iii) lowering the overall entrepreneurial ability. On the other hand, it promotes real economic growth through the following channels: (i) strengthening the ability of the financial sector to absorb social deposits via financial product innovation and industrial competition; (ii) alleviating the information asymmetry between creditors and borrowers and accurately identifying the ability of firms to repay loans; and (iii) improving the allocation of credit among firms with different financing constraints.
This paper constructs a two-sector growth model consisting of banks and firms to investigate how the financial sector's human capital affects real economic growth. It then tests the model using the 2008 Chinese Economic Census dataset and data from prefecture-level cities from 2003 to 2015. The theoretical analysis shows that there is an inverse U-type relationship between human capital in the financial sector and real economic growth which is driven by capital crowd-in and innovation crowd-out effects. A series of empirical analyses supports the model's predications. In particular, our simple counterfactual calculation suggests that the real economic growth rate will increase by about 0.45% when human capital is efficiently allocated between the financial and real sectors, and the contribution increases as China's economy grows. This paper obtains similar findings using the Chinese Industrial Database over the 2011-2013 period and confirms that the financial sector's human capital increases a firm's access to external financing and reduces capital misallocation among firms.
In sum, these findings demonstrate that increasing human capital in the financial sector does not absolutely promote or inhibit real economic growth,suggesting that there is an optimal allocation threshold of human capital between the financial and real sectors. Therefore, to maintain long-term and high-quality economic growth, it is important to optimize human capital allocation. This paper's theoretical analysis and empirical findings have important policy implications. First, because talented employees are drawn to the financial sector for its high salaries, policymakers should improve modes of income distribution. Second, it is essential to restrict the blind expansion of the financial sector and strengthen its functions of providing financial services to the real sector. The “financial sector transfers 1.5 trillion yuan of profits to the real sector” policy implemented in 2020 in response to the COVID-19 epidemic not only helps reduce the financing cost of firms, but may also help to optimize the allocation of human capital.
This paper makes three contributions to the literature. First, it is the first to examine how human capital in the financial sector affects China's real economic growth. Other studies focus on the growth effects of the allocation of human capital between rent-seeking and productive sectors, whereas this paper explores the effect of human capital allocation between the financial and real sectors. Second, this paper examines the influence of human capital allocation in the financial sector on real economic growth and the mechanism that underlies this influence. Although there are several related theoretical studies, this paper uses empirical evidence to confirm that the financial sector's human capital is conducive to expanding credit scale. Third, this paper enriches the understanding of the link between financial development and economic growth. Previous studies focus on the scale expansion and structural adjustment of the financial system, whereas this paper adopts the perspective of human capital allocation, which provides a new explanation for the inverse U-type relationship between financial development and economic growth.

Shadow banking can increase the profits of commercial banks and provide funds to small and medium-sized enterprises to induce economic development. However, shadow banking also finances high-risk projects, such as real estate, which leads to risk accumulation in commercial banks. Although shadow banking simultaneously affects commercial banks' profit and risk, studies only focus on its effect on the former, and there is a lack of research on the impact of shadow banking on the profit and risk of commercial banks from both theoretical and empirical perspectives. Moreover, in the last two decades, Chinese commercial banks have expanded rapidly by opening more branches, which may lower bank efficiency. Studies neglect the impact of “bad” inputs on bank efficiency, which may lead to errors when estimating Chinese bank efficiency. Therefore, investigating the impact of shadow banking and “bad” inputs on bank efficiency may provide important practical insights for the supply-side reform of the financial system.
This paper examines the impact of shadow banking and “bad” inputs on Chinese bank efficiency. We establish theoretical models to investigate the impact of shadow banking from the profit channel and the risk channel. By simultaneously distinguishing “good” and “bad” inputs and outputs, we extend the two-stage DEA model of Wang et al. (2014) that simply distinguishes between “good” and “bad” outputs. Additionally, we empirically examine the impact of “bad” inputs and shadow banking on the profit, risk, and efficiency of Chinese commercial banks. This paper makes the following four main contributions to the literature. First, we construct a theoretical model and investigate the impact mechanism of shadow banking on bank efficiency from the perspectives of profit and risk. Second, we extend the bank efficiency measurement model of Wang et al. (2014) by establishing a new two-stage DEA model that simultaneously distinguishes between “good” and “bad” inputs and outputs under the assumption of weighted variable returns to scale. Third, we develop a new system to analyze the efficiency of Chinese commercial banks. We first suggest that there are “bad” inputs in Chinese commercial banks. Next, we identify these “bad” inputs by using an inverse DEA model and apply the strong free disposability assumption in our model based on a thorough discussion of strong free disposability, week-free disposability, and non-free disposability. We then apply this new model to examine the efficiency of Chinese commercial banks. Finally, for the first time, we compare the impact channels and the impact extent of shadow banking on Chinese bank efficiency using a frontier considering the impact of shadow banking as the standard to measure the frontier minus the impact of shadow banking. The results show that our new theoretical model, the efficiency measurement model, and the new system to analyze the efficiency of Chinese commercial banks are more suitable for the analysis of Chinese commercial banks.
Additionally, we empirically analyze the impact of shadow banking on bank efficiency using data from 104 Chinese commercial banks from 2007 to 2017. The results show that shadow banking simultaneously increases bank profit and risk. Furthermore, we find that fixed assets and the number of employees are the “bad” inputs that can be compressed. The model that only differentiates outputs overestimates the efficiency of Chinese commercial banks, especially the four major banks and joint-stock commercial banks, indicating that the expansion of branches of large commercial banks does not improve bank efficiency. The results indicate that shadow banking is generally beneficial to the efficiency of large commercial banks, especially joint-stock commercial banks, but has very little impact on small and medium-sized commercial banks.
Our findings have two important implications. First, large commercial banks should promote the supply-side reform of the financial industry by compressing the input of fixed assets and reducing staff numbers, whereas small and medium-sized banks should target a different market position by providing a wide variety of services. Second, allowing commercial banks to develop a moderate degree of shadow banking while controlling its risk. Thus, compressing “bad” inputs and regulating shadow banking are important to increase effective financial supply, improve the financial supply structure, and increase bank efficiency.

China's compensation deferral policy is a debt incentive reform designed to help banks avert systemic risks. It aims to reduce the probability of bank risk-taking behaviors caused by the mismatch of incentives and risks. The reform plays important roles in averting and defusing major risks and promoting a virtuous cycle between economy and finance. The literature thoroughly discusses how compensation deferral affects risks, but there is less discussion on how compensation deferral affects bank profit efficiency.
Prior research does not consistently conclude whether the relationship between bank risks and bank profit efficiency is based on a synergy effect or a crowding-out effect. It is difficult to assess the impacts of China's debt incentive reform on bank profit efficiency throngh the relationship between compensation deferral and bank risk-taking. More importantly, there remains a lack of evidence regarding how risk prevention policy affects bank profit efficiency. The bank behavior changes when responding to the policy, their behaviors change, resulting in unexpected economic consequences. From the perspective of the incentive effect, the pay level of a bank's management is directly linked to the bank's profit efficiency. Hence, the implementation of compensation deferral will increase the uncertainty of executive interests, and thus weaken management's motivation to improve profit efficiency. However, because of career concerns, bank managers need to prevent declines in profit efficiency after reforms are imposed, otherwise their careers could be negatively affected. Furthermore, if management cannot identify underlying risks, it is usually difficult for a bank to effectively increase income or save costs. Further study is needed on whether and how compensation deferral affects a bank's profit efficiency.
Using a 2007 to 2018 sample of Chinese commercial banks, this paper uses the difference-in-differences method with staggered adoption to study the effects of compensation deferral on bank efficiency and the mechanisms causing the effects. The results show that the implementation of compensation deferral internalizes management behavior and reduces a bank's risk-taking activities. Compensation deferral may result in the reduction of a bank's profitability by decreasing revenue rather than increasing costs, and thereby causing profit efficiency to decline. However, the parallel trend test shows that the effect on profit efficiency is reversed at the fifth year after compensation deferral is implemented. Hence, the policy makes management pay more attention to the persistence of long-term performance, which helps reduce long-term performance volatility. Further analysis finds that the negative relationship between compensation deferral and bank efficiency mainly exists in joint stock banks(JSBS). This paper also finds that the implementation of equity incentives and the acceptance of moderate ARIX holdings can help weaken the negative relationships between bank efficiency and compensation deferral. Our paper shows that although compensation deferral negatively affects short-term bank performance, it also causes management to pay more attention to the stability and persistence of long-term bank performance. From the profitability perspective, our findings provide theoretical evidence for the effects of China's deferral compensation policy on the prevention of risks and stabilization of growth.
This paper makes several contributions. First, it explores the impact of compensation deferral reform on profit efficiency from a bank's micro-perspective. Previous research mostly examines whether compensation deferral can effectively avert and defuse risks from a regulatory perspective. This paper supplements the previous evidence on how the compensation deferral reform affects profit efficiency and stability from a bank's micro-perspective. The paper also analyzes the mechanisms by which compensation deferral affects bank profit efficiency from the cost and benefit dimensions, thereby providing a more comprehensive and in-depth understanding of how compensation deferral affects bank behavior. Second, this paper uses an exogenous shock to mitigate the endogeneity issue. It examines how changes in a bank's real behavior in response to the compensation deferral reform affect the bank's profit efficiency. Most studies discuss the relationship between risk and efficiency from the perspective of bank capital. However, there is strong endogeneity between risk prevention and bank profit efficiency. This paper uses the exogenous shock caused by the introduction of compensation deferral to control the impact of risks and analyze the mechanisms that directly affect a bank's profit efficiency. Finally, this paper finds that the implementation of equity incentives can alleviate the decline in profit efficiency caused by compensation deferral. Given that the compensation deferral reform plays a positive role in averting risks and stabilizing growth, our conclusions provide a reference on how to avert risks while limiting the consequential costs to profit efficiency.

In response to environmental conditions and the need for environmental protection, the former Chinese Ministry of Environmental Protection's Ambient Air Quality Standard (2012) establishes requirements for management of the whole environmental governance lifecycle to accelerate the treatment of air pollution, meet public needs, and improve the credibility of the government. Since the implementation of the new standard by all regions within the required schedule, local air quality monitoring realizes real-time, interference-free, and comprehensive coverage with direct reporting. The standard greatly increases the opportunity cost of local government inaction in environmental governance, facilitates environmental supervision by the public, and improves the probability that pollution emissions by firms will be punished. These pressures provide a strong motivation for enterprises, as the main source of Chinese innovation, to carry out whole-lifecycle green technology innovation. Environmental information disclosure creates an important force promoting green technology innovation and pollution and carbon reduction to achieve the double carbon target.
This paper is divided into three parts. First, we review the literature regarding the impact of environmental regulations on innovation by firms and combine it with the needs of policy promoting the development of green technology innovation. Given this context, we propose research hypotheses regarding the relationships between environmental protection policy and green technology innovation by firms. Since the implementation of the new standard, we find that green technology innovation by high environmental risk firms has become increasingly positive in response to stricter regional environmental protection law enforcement and more active media supervision. Second, taking all A-share listed firms in China from 2007 to 2017 as the research object and the staggered implementation of the Ambient Air Quality Standard in 2012 across cities as the quasi-natural experiment, we use a multi-period difference-in-differences (DID) method to analyze the differences between high and low environmental risk firms in green technology innovation before and after the implementation of the new standard. After the implementation of the new standard, we find that the green technology innovation of high environmental risk firms becomes more positive, as measured by both the quantity and quality of green innovation. The validity of this conclusion is confirmed by a series of robustness tests. The heterogeneity test finds that the new standard's effectiveness in promoting green technology innovation is more significant for state-owned firms and non-patent-intensive firms than for privately owned firms and patent-intensive firms. Further research shows that the effects of the new standard on green technology innovation are significantly enhanced by improvements in environmental law enforcement and the intensity of public and media supervision. Finally, the positive effects of the new standard lead to significant local air quality improvements. Our findings lead us to some policy suggestions. First, the authorities should strengthen and improve the environmental regulation system by classifying and improving the levels of environmental regulation. Second, the authorities should promote the positive advantages of using digital technology to assist environmental regulation in support of green innovation. Third, the authorities should establish a systematic approach to evaluate the effects of environmental regulation on enterprise green innovation. Lastly, a set of evaluation systems can be established to help firms and regulators recognize the content and complexity of green innovation and prudently manage the problems and uncertainties that may be encountered in the innovation process. Such evaluation systems can enable more prospective implementation of regulatory policies to encourage green innovation.
We contribute to the literature in several ways. First, from the perspective of institutional economics, we enrich the related theoretical research in the field of macro-environmental policy and micro-behaviors. The environmental regulation literature mainly studies the impacts of command-based and market-based regulation policies on pollution transfer, energy conservation, and emission reduction by firms and on environmental protection investment in general. We evaluate the effectiveness of macro-environmental policy from the perspective of green technology innovation by firms, thereby providing new evidence in the study of existing environmental regulations. Second, we creatively place the Ambient Air Quality Standard and green technology innovation into the same theoretical framework, thereby expanding and enriching the relevant literature on the factors that influence green technology innovation by firms. Finally, we analyze the regulatory and environmental effects of environmental law enforcement, public supervision, and media supervision. The results provide a useful reference to further motivate firms in their support for environmental governance and establish a sound system for the development of a green and low-carbon circular economy.

Share pledge financing has become common in China's capital market; however, it often brings great risk, especially in high-leverage companies. Once a firm's stock price falls sharply after share pledging and touches the unwinding line, its controlling shareholder will be under great pressure and may lose control rights. Therefore, the controlling shareholder often has a strong motivation to drive the company to conduct market value management to prevent the stock price from crashing to the liquidation line; this is commonly achieved by changing accounting policy or adjusting the firm's information disclosure behavior. However, research on the impact of shareholder equity pledging on the quality of accounting information mainly focuses on income statements (especially the information quality of earnings) and seldom deals with balance sheets.
To reduce the risk of debt default and the forced liquidation of the pledged shares, the controlling shareholder, out of self-interest, may lead the company to cover up bad news using leverage manipulation after equity pledging. Leverage manipulation refers to reducing the leverage level presented on the balance sheet, via the use of financial activity arrangements (e.g., off-balance sheet liabilities) and other accounting methods (Xu and Lu, 2020). Leverage manipulation is an appropriate proxy for the quality of balance sheet information because the higher the leverage level is, the lower the balance sheet information quality is. Additionally, the delisting system plan announced by Shenzhen Stock Exchange and Shanghai Stock Exchange in 2012 added delisting conditions, such as a firm's net assets being negative (with a negative value at the end of one year, the end of two consecutive years, and the end of three consecutive years corresponding to a delisting risk warning, listing suspension, and termination of listing, respectively), making it difficult for listed companies to avoid delisting by merely manipulating profits. Therefore, controlling shareholders who have pledged equity in high-leverage firms often have strong incentives to drive firms to manipulate leverage to reduce the risk of control transfer due to the leverage indicator being suspended or terminated from listing.
Based on the balance sheet information of A-share non-financial listed companies with high leverage in China from 1999 to 2019, this paper empirically tests the influence of controlling shareholders' share pledging on the possibility and extent of corporate leverage manipulation. We find that high-leverage companies with share pledging by controlling shareholders are more likely to engage in leverage manipulation, and the higher the pledge ratio, the greater the degree of leverage manipulation. Our conclusions remain unchanged after a series of robustness tests considering any potential endogeneity problems. We also find that these influences are more pronounced in high-leverage companies with lower growth, greater pressure on short-term debt servicing, more media attention, and higher stock price crash risk.
The research contributions of this paper are as follows. First, it expands the literature on the influencing factors of leverage manipulation. The few studies on the influencing factors of leverage manipulation are mainly from the perspective of company characteristics (e.g., leverage ratio and financing restrictions); however, this paper focuses on the equity pledging of controlling shareholders. Second, it enriches the literature on the economic consequences of share pledging. Unlike previous studies, this paper focuses on balance sheet information and investigates the impact of equity pledging from the perspective of leverage manipulation. The results show that the manipulation of balance sheet information is an important economic consequence of leverage manipulation. Furthermore, the study provides empirical evidence that can serve as a reference for policymakers to prevent corporate leverage manipulation and standardize the share pledging of controlling shareholders. The findings also suggest the need to further regulate the equity pledging of controlling shareholders, especially in high-leverage companies with a high pledge ratio, and to guard against the adverse effects of leverage manipulation on systemic financial risks. The results indicate that to prevent limited credit funds from entering high-liability pledgers with leverage manipulation and improve the efficiency of credit resource allocation, it is necessary to strengthen the monitoring of the quality of balance sheet information.

The Administrative Measures for the Operation and Management of Publicly Offered Securities Investment Funds, implemented in August 2014, require the leverage of fixed-income funds to be below 140% but give no explicit requirement for the leverage of equity funds. In practice, equity funds barely invest on margin and even set aside a high proportion of cash reserves (Simutin, 2014; Boguth and Simutin, 2018). This self-imposed zero-leverage constraint is implicit and motivates funds to indirectly gain leverage by holding high beta stocks when funding conditions deteriorate. Based on this intuition, this paper uses actively managed equity-oriented open-end funds from 2003 to 2019 to explore the implications of the aggregate mutual fund beta.
We aggregate all actively managed equity funds in China to a hypothetical large fund and calculate the value-weighted average market beta of its aggregate A-share holdings. Following Brunnermeier and Pedersen (2009), we conjecture that a priced liquidity risk factor drives the dynamic of the aggregate mutual fund beta. The time series of the aggregate mutual fund beta contains useful information on the tightness of implicit leverage constraints for Chinese mutual funds and reflects the liquidity condition in the stock market. Furthermore, we investigate whether loadings on changes in the aggregate mutual fund beta predict returns in the cross-section. We find that exposure to the monthly change in the aggregate mutual fund beta unconditionally fails to predict returns at the firm and fund levels. In contrast, such exposure negatively predicts stock and fund returns following periods of low sentiment or low liquidity. The negative price of the change in the tightness of implicit leverage constraints is consistent with the notion that an asset that pays off when implicit leverage constraints are tighter provides capital when the capital is most valuable. As a result, the strong performance of stocks and funds with low exposure to implicit leverage constraints following periods of low sentiment or low liquidity can be rationalized as compensation for liquidity risk. However, short-sale constraints prohibit the positive relationship between leverage tightness exposure and stock returns after periods of high sentiment.
By exploiting the staggered implementation of pilot marginable stocks in China, our study compares the cross-sectional pricing power of changes in implicit leverage constraints among pilot and non-pilot stocks. We find that the distorted risk-return relationship is more pronounced among stocks that are ineligible for margin trading. This confirms our conjecture regarding conditional pricing, namely, that in high-sentiment regimes, short-selling constraints lead to active leverage constraints and thus affect the pricing kernel.Next, recent papers document that funds oriented toward small-and medium-cap stocks exhibit a stronger liquidity preference in deteriorating funding conditions (Li et al., 2015; Zhang et al., 2017). We construct the fund-beta-based implicit leverage constraint using funds investing in small-and medium-sized stocks and document that this aggregate beta measure captures the dynamics of funding liquidity in a more timely manner.
This study extends the literature in two ways. First, we propose a measure for implicit leverage constraints. Different from developed markets, retail investors have long been important market participants in the A-share market. Meanwhile, the recent emergence of high-frequency trading, together with retail investors' noisy trading, may invalidate turnover as an effective proxy for market funding conditions (Baker and Wurgler, 2007). The proposed aggregate risk-taking measure of mutual funds can be used as a market-based forward-looking signal of market illiquidity. Second, we explore the interaction between implicit and explicit leverage constraints. We show that the distorted risk-return relationship between leverage tightness exposure and stock returns is more pronounced among stocks that are ineligible for margin trading, especially after periods of high sentiment. These findings provide direct evidence of the conditional pricing of liquidity risk.
However, semi-annual snapshots of fund holdings fail to capture the daily trading activities of active funds, thus contaminating our liquidity measure. We mitigate this concern by dropping funds with a high probability of window dressing, and our main findings remain unchanged. In addition, it is possible that other forces overlap with our sentiment channel; for example, the timing ability of fund managers and investor inflows/outflows may affect the aggregate fund beta. Furthermore, it is relevant to investigate whether mutual fund herding during high-sentiment periods affects price efficiency. We leave these questions for future research.

The effective restraint of corporate fraud is crucial to protect investor interests and enhance the running efficiency of the capital market. The margin trading and short-selling system launched in 2010 is an important institutional innovation in China's capital market that broke the long-standing “one-sided market” pattern in which short selling was constrained. Compared with other investors, short sellers are more motivated to track and monitor management misconduct (Karpoff and Lou, 2010) and deter management through short selling, thus forming effective external supervision (Massa et al., 2015). China's short-selling system allows investors to short company stocks based on negative information and thus profit from this information. Short selling causes negative information that is illegally hidden by companies to send risk signals to the market, which may attract regulatory attention and increase downward pressure on stock prices, possibly leading to a serious decline in market value and reputation loss for companies (Karpoff et al., 2008). Therefore, management restrains its unethical behavior to maintain the company's market value (Li et al., 2017). However, studies on the relationship between short selling and corporate irregularities are insufficient.
Using data from Chinese A-share listed companies from 2008 to 2017 and combining the bivariable probit model and a difference-in-differences model, this paper explores the dual governance effect and transmission path of short selling on corporate fraud from the perspective of market-oriented governance. We find that short selling not only significantly reduces the fraud tendency of the target company but also significantly improves the probability of violation detection. Moreover, we show that short selling significantly reduces the time taken to detect violations. This indicates that the dual governance effect of short selling on corporate violations is mainly realized through two channels: ex-ante deterrence and ex-post punishment. Additionally, the results suggest that the volume of short selling by the target company increases significantly in the year when a violation occurs, which indicates that short sellers have information advantages and a high sensitivity to violations by the target company. Further tests reveal that short selling may have a dual governance effect on corporate irregularities through internal corporate governance efficiency and external market information efficiency. These tests show that short selling strengthens the supervision and intervention of internal governance bodies such as major shareholders and independent directors on corporate violations, thus restraining the trend of prior violations. Moreover, we show that short selling increases the attention paid to the company by analysts in the external capital market and the transmission efficiency of negative information, thus increasing the probability of post-violation detection. We also find that the governance effect of short selling is influenced by the regulatory environment (legal supervision, internal control, and industrial violations) and the characteristics of the target company (company growth, market size, and stock price volatility).
This paper makes the following contributions to the literature. First, it expands research on the economic consequences of short selling. Studies on short selling mainly concentrate on the price efficiency of the capital market. However, recently, scholars have begun to focus on the effects of short selling on corporate decisions, including the quality of information disclosure (Karpoff and Lou, 2010; Li et al., 2017), earnings management (Massa et al., 2015), investment and financing strategy choices (Jin et al., 2015; Gu and Zhou, 2017), and corporate innovation (Hao et al., 2018; Tan and Qian, 2020). This paper focuses on corporate violations and sheds light on the economic consequences of short selling. Second, it elucidates the effect and transmission mechanism of short selling on corporate irregularities. Unlike previous studies (Meng et al., 2019), this paper breaks through the single perspective of signal transmission theory and constructs an analytical framework from the dual perspectives of the information efficiency of the capital market and the efficiency of internal corporate governance. It empirically reveals the dual governance effect of short selling on corporate violations. Additionally, we find that short selling significantly shortens the time taken to investigate and punish violations, especially when the short selling volume of the target firm increases significantly in the year when the violation occurs. Third, this study has crucial practical implications. It empirically reveals that short selling plays a market-oriented governance role in restraining corporate violations, suggesting that short selling could become a supplementary means to enhance investor protection. The results indicate that it is of great practical value to introduce a market-oriented governance mechanism of short selling to restrain corporate irregularities and enhance investor protection.