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The Effect of the China Connect

Chang Ma, John Rogers, Sili Zhou, Nov 13, 2019

We study the effect on Chinese firms of the Shanghai (Shenzhen)–Hong Kong Stock Connect. The Connect, introduced in the mid-2010s by the government, provided important capital account liberalization. It created a channel for cross-border equity investments into a select set of Chinese stocks while the overall capital controls policy remained in place. Using a difference-in-difference approach, we find that mainland Chinese firm-level investment is negatively...

Black Markets for License Plates in Chinese Megacities

Oystein Daljord, Mandy Hu, Guillaume Pouliot, Junji Xiao, Jan 29, 2020

Chinese megacities ration new car sales by capping the number of license plates they issue that permit driving within city limits. Concerns regarding the fairness of this policy have led city governments to use lotteries to allocate either all or a share of the license plates. Lotteries create gains from trade that have stimulated black markets for license plates in such cities...

Can Investment Incentives Crowd Out Innovation? Evidence from China

Shaowei Ke, Yao Lu, Xinzheng Shi, Yeqing Zhang, Nov 06, 2019

The Chinese government has been using strong fiscal stimuli to encourage investment. While these fiscal policies, such as investment tax credits, often encourage firm investment, we find that investment tax incentives may generate an unintended reduction of firms’ innovation. Moreover, the crowding-out effect is non-monotonic in the level of financial constraints.

Overpricing in China’s Corporate Bond Market

Yi Ding, Wei Xiong, Jinfan Zhang, Nov 27, 2019

In China’s corporate bond market, the yield spread of newly issued bonds at their first secondary-market trade is on average 5.35 bps higher than the issuance spread. This overpricing is robust across bond issuances with different credit ratings, maturities, issuance types, and issuer status. Evidence suggests that competition among underwriters drives this overpricing through two specific channels—either through rebates to participants in issuance auctions or through direct auction bidding by the underwriters for themselves or their clients.

Does VAT Have Higher Tax Compliance Than a Turnover Tax? Evidence from China

Jianjun Li, Xuan Wang, Jan 15, 2020

We study the effects of compliance with the value-added tax (VAT) by exploiting the reform that replaced business tax (BT) with VAT in China beginning in 2012. We find that replacing the BT with VAT significantly increases the reported sales and costs for treated firms, and the impact is much stronger for business-to-business (B2B) transactions than for business-to-consumer (B2C) transactions. Buyers in B2B transactions...