SummaryLaw finance and economic growthin China.docx

SummaryLaw finance and economic growthin China.docx

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SummaryLawfinanceandeconomicgrowthinChina

Mid-termreport

Summaryfor“Law,finance,andeconomicgrowthinChina”

a）Acoverletterofthepaper

Deareditor,

Wewouldliketosubmittheenclosedmanuscriptentitled"Law,finance,andeconomicgrowthinChina".Belowareourresponsestoyoursubmissionquestions.

1.Titleandthecentralthemeofthearticle

Papertitle:

“Law,finance,andeconomicgrowthinChina".ThispapercomparesChina’sformalsystemsoflawandfinanceandgoverningmechanismswithotherdevelopedandemergingcountries.AndtheyfindthatChinsisanimportantcounterexampletothefindingsinthelaw,institutions,finance,andgrowthliterature.Neitheritslegalnorfinancialsystemiswelldeveloped,yetithasoneofthefastestgrowingeconomies.AfterexaminingtheStated,ListedandPrivateSectors,theyfindthePrivateSectorgrowsmuchfasterthantheothersandprovidesmostoftheeconomy’sgrowth.Theimbalanceamongthethreesectorssuggeststhatalternativefinancingchannelsandgovernancemechanisms,suchasthosebasedonreputationandrelationships,supportthegrowthofthePrivateSector.

2.Thepartaddressedexcellent

Ibelievethatfouraspectsofthismanuscriptwillmakeitexcellent.First,thetitleisverycommon,butthecontentisnewtoreadersandresearchers.Second,thestructureframeworkiswonderfulandclear.Third,PanelDataapplieswellinthepaper.Final,theconclusionimpliesthatthereareimportantfactorsconnectinglaw,institutions,finance,andgrowthnotwellunderstood.AbetterunderstandingofhowthesenonstandardmechanismsworktopromotegrowthcanshedlightonoptimaldevelopmentpathsnotonlyforChina,butalsomanyothercountries.

3.Name,faxandemailaddressofthecorrespondingauthor

Authors:

FranklinAllen,JunQian,MeijunQian

Tel.:

+12158983629-fax:

+12155732207

E-mailaddress:

allenf@wharton.upenn.edu（F.Allen）.

Finally,thispaperisoriginalunpublishedworkandithasnotbeensubmittedtoanyotherjournalforreviews.

Sincerelyyours,

b）       Themainconclusion

Recentlyseveralrelatedliteratureonlaw,institutions,finance,andeconomicgrowthhaveemergedinfinancialeconomics.However,Chinaisdifferent.ThispapercomparesChina’sformalsystemsoflawandfinanceandthealternativeinstitutionalarrangementsandgoverningmechanismswithotherdevelopedandemergingcountries.AndtheauthorsexaminetherelationbetweenthedevelopmentofthesesystemsandChina’economicgrowth.

Withoneofthelargestandfastestgrowingeconomiesintheworld,Chinadiffersfrommostofthecountriesstudiedinthelaw,institutions,finance,andgrowthliterature,andisanimportantcounterexampletotheexistingfindings:

Itslegalandfinancialsystemsaswellasinstitutionsareallunderdeveloped,butitseconomyhasbeengrowingataveryfastrate.AfterexaminingthreesectorsoftheChineseeconomy,thelaw–finance–growthnexusestablishedbytheexistingliteratureworkswellfortheStateandListedsectors.Withpoorlegalprotectionofminorityandoutsideinvestors,（standard）externalmarketsareweak,andthegrowthofthesefirmsisslowornegative.However,thesize,growth,andimportanceofthesetwosectorsintheeconomyaredominatedbythoseofthePrivateSector.Inspiteofrelativelypoorerapplicablelegalprotectionandstandardfinancingchannels,thePrivateSectorhasbeengrowingmuchfasterthantheothersandhasbeencontributingtomostoftheeconomy’sgrowth.Thesystemofalternativemechanismsandinstitutions,suchasthosebasedonreputationandrelationships,playsanimportantroleinsupportingthegrowthinthePrivateSector,andtheyaregoodsubstitutesforstandardcorporategovernancemechanismsandfinancingchannels.

TheresultsonthedifferencesamongthethreesectorsinChinachallengetheviewsupportingthelaw–finance–growthnexus.Moreover,thesuccessofthePrivateSectorinChinaalsochallengestheviewthatpropertyrightsandthelackofgovernmentcorruptionarecrucialindeterminingfinancialandeconomicoutcomes.AlthoughtheresultsarebasedonChina,similar’substitutes’basedonreputationandrelationshipsmaybebehindthesuccessofothereconomiesaswell,includingdevelopedeconomies.Atthesametimetheresultshavegeneralimplications:

thereareimportantfactorsconnectinglaw,institutions,finance,andgrowthnotwellunderstood.Abetterunderstandingofhowthesenonstandardmechanismsworkcanstillberesearchedindepth.

c）        Policyimplicationsoftheresearch

InthispapertheauthorshavealreadyexaminedthreesectorsintheeconomyandfindthePrivateSectorhasbeengrowingmuchfasterthantheothers,contributingtomostoftheeconomicgrowth.ThenwhatthegovernmentshoulddotocontinuepromotingPrivateSectorgrowth?

Besides,Chinahasrealizedeconomicgrowthunderweaklegalandfinancialsystem,thenifChinacantakeactionstoimprovelegalandfinancialsystem,cantheeconomicgrowfaster?

Whatthepolicyimpliesinthepaper?

ImakethefollowingpolicyrecommendationsinviewofthecurrentsituationinChina.

1.Increasefinancialsupportandexpandthefundingsources

Inthispaper,IfindlocalgovernmentplaysanimportantroleinthedevelopmentofPrivateSector.Alternativefinancialchannelsandgovernancemechanismsreplacestandardcorporatemechanisms.TocontinueacceleratingthedevelopmentofthePrivateSector,thegovernmentshouldincreasefinancialandfundingsupportandmakethecorrespondingpreferentialpoliciestosupportthePrivateSector,aswellasStatedandListedSector.

2.Developthelocalfinanceandprivatefinanceactivelyandsteadily

Theregionsshouldactivelypromotemorefinancialinnovationstrategy,makingtheoperationofthefinancialsystemmorecloselywithlocaleconomicdevelopment.SupportfromfinancialinstitutionspromotesvariousSMEsintheregionaleconomicdevelopment,thuscontributingtoregionalemploymentandaddingstrongvitalitytothelocaleconomic.Meanwhile,developmentandgrowthofSMEshavealsoincreasedthesizeoffinancialinstitutions,providingsupportforexpandingbusinessandcreatingbasisconditionsforincreasingoperatingincome.

3.Relievefinancialconstraintsandemphasizetheroleofmarket

Thegovernmentshouldregulatethedevelopmentoffinancialinstitutionsusingmarketmechanisms,promotevariousfinancialinstitutionsandfinancialintermediariesvigorouslyandincreasetheefficiencyoffinancialsystem.Meanwhilegovernmentreducesgovernment'sfinancialintervention,strengthenthemarketmechanismandcreatetheconditionsforfinancialdevelopmentthroughthefinancialsysteminnovation.

d）       Methods,especiallytheempiricalmethodsused

Inthispaper,authorsdon’tapplylotsofcomplextestsormodels.Ithinkthemethodsusedaremainlytwo.NextIwilllistfollowedindetail.

1.Comparativeanalysis

Ithinkoneofthefeaturesinthispaperisalargenumberofapplicationsofcomparativeanalysis.AuthorsusecomparativeanalysisinSection2,3,4and5.Whenanalyzingthelegalandfinancialsystem,theauthorsdon’tshowthedataofChinaonly,butcompareChinawithotherdevelopedcountriesinthewestern.Meanwhile,tomakethepapermorepersuasive,theauthorscomparewithotheremergingcountriesnext.Whenresearchingonthedevelopmentofthethreesectors,theylistthedatafrom1996to2002,usinghistoricalcomparison.Next,authorsstudyonthedifferentimportanceofthefinancingchannelsinthethreesectorsrespectively.Finally,theyfocusonthePrivateSector.Forthefirms,authorscomparetheannualreturninthepastfiveyearsandnextthreeyears,theownershipandfinancialchannelswhenstartupandcurrent.Iftheyapplylotsofmodelsandconductmanycomplextests,wemaynotunderstand.Thiscomparativeanalysisalsomakestheideaclearandsimple.

2.Empiricalmethods

Inthispaper,empiricalmethodsmainlyconcentratedonSection4.Theauthorsperformthreedifferentsetsofempiricaltestsfindsimilarresults.Concreteempiricalmodelsarepresentedbelow.

Method1:

“Syntheticfirm”approach

Step1:

UsingthesummarystatisticsfromLLSVsamplestocreatea“syntheticFirm”foreachofthe33countries.Eachfirmcharacteristicisequaltothemedianofthesamevariable.Followingthesameprocedure,asyntheticfirmisalsocreatedforChinabasedontheinformationof1,100+firms.

Step2:

ThreeOLSregressionsarerunonthe33（LLSVcountries）“synthetic”observations.Thedependentvariablesinthesetestsare:

（1）dividend/earningsratio;

（2）dividend/salesratio;and,（3）Tobin’sQ（measuredbymarket-to-bookassetsratio）.TheindependentvariablesarethesameonesusedinLLSV.Basedontheresultsfromeachofthethreeregressions,wethenconductanout-ofsamplepredictionforChinausingtheestimatedcoefficientsandvariances.

Step3:

Comparethe“true”（observed）firmcharacteristicsoftheChinesesyntheticfirmtothosepredictedvaluesfromStep2,andseewhetherthetruevaluefallsintheboundariesofpredictedvalues.

Method2:

“Alpha”approach-utilizingthealphanotationfromassetpricingmodels

Therearetwoversionsofthismodel:

restrictedandunrestricted,dependingonwhetherwerestrictthecoefficientsoneachindependentvariabletobethesameforChinesefirmsandforfirmsinothercountries.

Method2-1:

RestrictedModel

Method2-2:

Unrestrictedmodel

Method3:

Firmlevelout-of-sampleprediction

Authorsalsoperformfirm-levelout-of-samplepredictions,basedontheregressionresultsfromLLSV.Theresultsaresimilartotheabovetwomethods.Method3canactuallybeproventobemathematicallyidentica