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China at the Crossroads Conference August 29-30, 2005. Financial Openness and the Chinese Growth Experience. Geert Bekaert Columbia University and NBER Campbell R. Harvey Duke University and NBER Christian T. Lundblad Indiana University. Financial Openness and China Plan.
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China at the Crossroads Conference August 29-30, 2005 Financial Openness and theChinese Growth Experience Geert Bekaert Columbia University and NBER Campbell R. Harvey Duke University and NBER Christian T. Lundblad Indiana University
Financial Openness and ChinaPlan • A Panel Perspective on China's Growth • Financial Openness and Growth • Empirical Results • Heterogeneity of Real Effects of Financial Openness on Growth
Financial Openness and ChinaHistorical perspective All real, per capita; not PPP-adjusted; from World Bank.
Financial Openness and ChinaNeoclassical Model • Barro (1991, 1992): • ≠ growth accounting GDP Growth Convergence Effect Steady state GDP determinants
Financial Openness and ChinaModel Better measure to capture risk sharing benefits: idiosyncratic consumption growth volatility where gi,t+k = k-period average of consumption growth for country i, xi,tand zi,t = control variables i = country; w=world = conditional variance of
Financial Openness and ChinaHistorical perspective In late 1990s, Bekaert and Harvey begin a research program on financial openness • Time-lines constructed for • “Official” equity market liberalizations • ADR and Country Fund Launches • Capital account openness • Banking reforms • Privatizations • Capital Flows • FDI activity (to do)
Financial Openness and ChinaHistorical perspective Chronologies also contain • Important political events • Macroeconomic events • Information on institutions Currently, 56 emerging markets and over 400 pages of information • http://www.duke.edu/~charvey/chronology.htm
Financial Openness and ChinaWhat are the financial effects of openness? • Decreased cost of capital • Changes might make country more sensitive to world shocks • Impact on equity volatility not clear => Empirical work consistent with predictions (Bekaert and Harvey (2000), Henry (2000), Kim and Singal (2000))
Financial Openness and ChinaWhat are the real effects of openness? • If cost of capital decreases, more projects NPV>0 • Investment increases
Financial Openness and ChinaWhat are the real effects of openness? Financial Liberalization Cost of Capital Growth Opportunities Relaxing Fin Constraints Financial Development Investment Efficiency of Investment Growth
Financial Openness and ChinaSharply different views from literature… • Liberalization implies consumption booms and inefficient investment (crisis literature) • Liberalization may lead to reduced savings (endogenous growth literature) • Liberalization may lead to “hot speculative capital” and induce capital flight (Stiglitz & others)
Financial Openness and ChinaPrevious research • Bekaert-Harvey-Lumsdaine (Journal of Financial Economics, 2002) • Dating the integration of world markets • Bekaert-Harvey-Lundblad (Journal of Financial Economics, 2005) • GDP growth positively impacted by financial openness • Bekaert-Harvey-Lundblad (Journal of International Money and Finance, 2006) • Growth volatility does not increase, on average, after opening • Bekaert-Harvey-Lundblad-Siegel (Working paper, 2005) • Growth opportunities linked to growth
Financial Openness and ChinaPrevious research • Bekaert-Harvey (Journal of Finance, 1995) • Model of time-varying world market integration (expected returns) • Bekaert-Harvey (Journal of Financial Economics, 1997) • Model of time-varying world integration (expected returns; volatility) • Bekaert-Harvey (Journal of Finance, 2000) • Financial openness impacts cost of capital, volatility, country’s sensitivity to world events • Bekaert-Harvey-Lundblad (Journal of Development Economics, 2001) • Econometric framework developed for panel growth regressions • Bekaert-Harvey-Lundblad (Journal of International Money and Finance, 2002) • Capital flows, liberalization and the real economy
Financial Openness and ChinaDecomposing the growth regression
Financial Openness and ChinaDecomposing the growth regression
Financial Openness and ChinaGrowth, Investment, and Total Factor Productivity
Financial Openness and ChinaAdding investment to growth regression • Reduces coefficient on private credit to GDP • Significant in consumption but not in GDP growth regressions • Raises predicted GDP growth by 0.4%
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaWhy do countries respond differently to openness?
Financial Openness and ChinaConclusions • China’s growth experience cannot be explained by standard growth models • Using standard growth determinants, China’s predicted growth in 2003 was 2.57% (versus 2.00% in 1980) • China is lower than average on: • quality of institutions • stock market development • capital account openness
Financial Openness and ChinaFurther research • Embed quality of institutions; finer measures of financial development in growth decompositions • Study factor productivity growth? • Study determinants of GDP per capita? (see Roll and Talbot, 2004)
