CONTENTS

Toward A Theory of Optimal Financial Structure in Economic Development Justin Yifu Lin, Sun

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.......¡­Xifang and Jiang Ye ª« (ª©4ªª)

Internal and External Imbalance and China's Fiscal and Tax Policy Reform

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Fan Gang, Wei Qiang and Liu Pengª« (ª©18ªª)

An Analytical Framework of China Foreign Exchange Reserves:

Based on Financial Stability and Appropriate Scale

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Li Wei and Zhang Zhichao ª« (ª©27ªª)

Efficiency of Insurance Fund Utilization in China's Insurance Companies: A Resource-Based Two-Stage DEA Model

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­................................¡­Huang Weiª« (ª©37ªª)

Private Information Arbitrage in Chinese Stock Market: A Study Based on ª«R2

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Feng Yongfu, Dong Yan, Yuan Zebo and Yang Renmeiª« (ª©50ªª)

Trust, Transaction Cost and Mode of Trade Credit

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Liu Fengwei, Li Lin and Xue Yunkuiª« (ª©60ªª)

Economic Geography and Inequality of Regional Wages

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Fan Jianyong and Zhang Yanª« (ª©73ªª)

Spread-backwash and Market Area Effects of Urban and Regional Growth in China

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­.Ke Shanziª« (ª©85ªª)

Determinants of Export in Chinese Local Manufacturing Firm

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Liu Zhibiao and Zhang Jieª« (ª©99ªª)

Higher Education Reform, Precautionary Saving and Consumer Behavior

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Yang Rudai and Chen Binkaiª« (ª©113ªª)

Analysis of Signaling Game for Medical Credence Goods

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Huang Tao and Yan Taoª« (ª©125ªª)

Economic Development and Relation between the Industry and Agriculture Sectors:

 The Chinese Planning Economy Revisited in Cliometrics

ª«¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Sun Shengminª« (ª©135ªª)

A Summary for the 2009 Forum of China's Economic Growth and Business Cycles

¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Zhang Liancheng and Zhou Mingshengª« (ª©148ªª)

A Book Review¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­¡­Yang Jingnianª« (ª©156ªª)

Toward A Theory of Optimal Financial Structure

in Economic Development

Justin Yifu Lin  (World Bank)Sun Xifang  (Seoul National University)

Jiang Ye  (Industrial and Commercial Bank of China)

Abstract: The factor endowments of an economy at each stage of its development determine the optimal industrial structure in the real sector, which in turn constitutes the main determinant of the size distribution and risk features of viable enterprises at that stage. Meanwhile, each institutional arrangement in the financial system has both advantages and disadvantages in mobilizing savings, allocating capital, and diversifying risks when facilitating financial transactions. Therefore, there exists endogenously determined optimal financial structure for the economy at each stage of development.

Key Words: Financial Structure; Comparative Advantage; Optimal Financial Structure

JEL Classification:G00, O16, O43

Internal and External Imbalance and China's Fiscal and Tax Policy Reform

Fan Gang, Wei Qiang and Liu Peng

(National Economic Research Institute, China Reform Foundation;

CCER, Peking University; Comprehensive Department, Ministry of Commerce)

Abstract: China's huge current account has become an important influence factor for its sustainability development. Through the analysis for the reasons of the external imbalance, this paper tries to state that it has close relation with internal imbalance, which is characterized by low consumption and high saving rate. The latter can be accused of too much dividends of Stated-owned enterprises and not sharing out bonus with ministry of finance. This paper suggests that the relative fiscal and tax policy reform will solve the above problems.

Key Words: External Imbalance; Saving-Consumption Imbalance; SOE Dividends; Fiscal and Tax Policy Reform

JEL Classification:F32£¬F33£¬G01

An Analytical Framework of China Foreign Exchange Reserves:

Based on Financial Stability and Appropriate Scale

Li Wei and Zhang Zhichao

£¨East China Normal University£©£¨Durham University£©

Abstract: The literature of appropriate foreign exchange reserves based on the financial stability is the research focus at home and abroad. We try to build a analytical framework including foreign exchange reserves, financial instability, capital flow and the real economy variables. We try to use the theoretical model and empirical methods exploring the impact on foreign exchange reserves in emerging market economies of the relevant factors and simulating the size of China foreign exchange reserves desired. The relevant findings show that, if the domestic financial instability and capital flow become larger, foreign exchange reserves in the amount of broad money will increase in proportion. The marginal impact of the financial instability and the real economic situation on the foreign exchange reserves have shown a gradual decline posture and it is indicated that the role of foreign exchange reserves is limited. In addition, the simulation results show that under the premise of ensuring domestic financial stability, the total amount of China foreign exchange reserves are not excessive. It is in the desired appropriate range interval.

Key Words:Foreign Exchange Reserves; Financial Instability; Capital Flow; Real Economy

JEL Classification:E310£¬ F410£¬ F310

Efficiency of Insurance Fund Utilization in China's Insurance Companies:

A Resource-Based Two-Stage DEA Model

Huang Wei

(School of Insurance, University of International Business and Economics)

Abstract:This paper measures the efficiencies and their evolution of the whole process of insurance fund utilization as well as the two sub-processes for the 246 insurance companies in China from 1999 to 2006 by using a resource-based two-stage DEA model. Compared with the traditional DEA models, the resource-based two-stage DEA model is capable of identifying the causes of inefficiency in the insurance fund utilization more accurately. Our studies find that the efficiency scores per year are not high, not only in the fund raising stage and profitability stage, but also in the overall process of insurance fund utilization. Compared with the foreign insurance companies, the efficiency advantage of domestic insurance companies shows a V-shaped trend, which reflects that the efficiency advantage in the fund raising stage is no longer obvious, while the efficiency advantage in the profitability stage is gradually decreasing and has been exceeded by the foreign companies. This paper further finds significant inefficiency in the profitability stage for the life insurance companies, although they have efficiency advantage in the fund raising stage; domestic property insurance companies have faced severe challenges in both the fund raising stage and profitability stage.

Key Words:Insurance Companies; Insurance Fund Utilization; Efficiency; Data Envelopment Analysis

JEL Classification:G14, G22, F14

Private Information Arbitrage in Chinese Stock Market:A Study Based on R²ª§

Feng Yongfu£¬ Dong Yan£¬ Yuan Zebo and Yang Renmei

(School of Securities and Futures£¬ Southwestern University of Finance and Economics)

Abstract:R²is the proportion of variability in a data set that is accounted for by a statistical model. Roll (1988) has successfully introduced R² into the analysis of information problem in stock market. Afterwards, R² has been widely applied in various studies on financial market. However, in some cases, Roll¡¯s R²  is misunderstood and brings controversial results. Our paper has thoroughly reviewed current literatures on R² and justifies that R² can be used as a proxy for measuring private information arbitrage activities in the stock market. In this paper, 140 out of SHSE 180 stocks have been analyzed and the results show that (1) most of them have encountered the problem of private information arbitrage. And 60% among these stocks might experienced serious arbitrage problem. (2) Also, our panel analysis on the determinants of private information arbitrage shows that the ownership of prime shareholder, the percentage of non-tradable shares will significantly reduce R² and hence increase arbitrage opportunity. While institutional investors, stock market reformation, sizes of listed companies will increase R² and reduce arbitrage opportunity.

Key Words:Private Information£» Arbitrage£»R²

JEL Classification:C23£¬G12£¬G14

Trust, Transaction Cost and Mode of Trade Credit

Liu Fengwei, Li Lin and Xue Yunkui

(Shanghai National Accounting Institute; Shanghai Institute of Foreign Trade; Ch

eung Kong Graduate School of Business)

Abstract£ºThis paper investigates how trust, as an informal institution, affects corporate transaction cost and financial structure. Using trust index of different provinces in China, we find that differences of trust level in different regions of China cause different contract forms in different regions. The lower the regional trust level, the higher transaction costs of firms in that region. We prove this relationship between trust level and transaction costs because we find that firms in regions with a lower trust level use trade credit mode with higher transaction costs such as prepayments or notes payable and have more selling expenses and discounts per sales revenue. The conclusion of this paper supports that the local trust environment influences transaction behaviors and contract structure of firms and also indicates that trust has the same vital economic significance to firms as formal institutions. This paper also verifies the transmission characteristics of trust between ¡°groups¡± and ¡°individual¡±, which is practically significant for us to understand the interest relationship between the ¡°groups¡± and ¡°individual¡±.

Key Words£º Trust£»Transaction Cost£»Mode of Trade Credit

JEL Classification£ºD23, G32, L14

Economic Geography and Inequality of Regional WagesFan Jianyong and Zhang Yan

(Institute of World Economy, Fudan University; Fudan-Cixi Institute of Development Research)

Abstract£ºCan the spatial distribution of demand explain inequality of regional wages? Using multi-regional input-output table in 1997 and market access method of Redding and Venables(2004), we calculate market access of 215 prefectural level cities in China. Based on New Economic Geography model and calculation of market access, we find that: 1ª± market access varies greatly among prefectural level cities; 2elasticity coefficient of wages with respect to market access is about 22%¡ª32%. Based on empirical research above, we argue that, regional difference of market access results in wage inequality, and the former is closely related with insufficiency of labor mobility and displays that rural labor is no longer infinitely supplied.

Key Words£º Market Access; Labor Mobility; Inequality of Regional Wages

JEL Classification£ºL690, O140, R120

Determinants of Export in Chinese Local Manufacturing Firm

Liu Zhibiaoª¬a and Zhang Jieª¬b

(a: Business School of Nanjing University£»b: Renmin University of China)

Abstract£ºWith the questionnaires from 342 local companies, we conclude that intra-product division, enterprise¬ðs size and location have positive effects on China¬ðs manufacturing companies¬ð export competitiveness, while there is no such crucial impact from other factors strengthened by classical trade theory such as technology innovation, human capital and capital intensity. In the context of China¬ðs economic transformation, institutional factors play an important role on local companies¬ð expansion of export, which shows itself in the promotion to small-scaled companies¬ð export. China¬ðs local enterprises have an advantage in its conciliatory income of so-called clustering effect, a side effect of which is that they can also lock local enterprises in the bottom of industrial chain and block their further improvement in export competitiveness ability.

Key Words£º Local Manufacturing Firm; Determinants of Export; Global Value Chain

JEL Classification£ºO12£¬O19

Higher Education Reform, Precautionary Saving and Consumer Behavior

Yang Rudaiª¬a and Chen Binkaiª¬b

(a: China Center for Rural Research (CCRR), Xiangtan Universityb: School of Economics, Central University of Finance and Economics)

Abstract£ºSubstantial empirical researches show that households in China have high incentive of precautionary saving; however, few micro-data-based studies on the reasons accounting for this incentive have been made. Based on the CHIP dataset, cross-section analysis demonstrates that higher education reform in 1999 has a significant Squeeze-out effect on household consumption, and marginal propensity to consume of households with members attaining higher education had decreased by 12 percent from 1995 to 2002ª± Under the Life Cycle Model frame, a theoretical model is constructed with education being introduced in. Simulation analysis indicates that anticipation of increasing uncertainty as a result of higher education reform is the main reason that accounts for the higher incentive of precautionary saving and thus the sluggish consumption demand in China.

Key Words£º Higher Education Reform; Precautionary Saving; Consumer Behavior

JEL Classification£ºI23, E21, D63

Economic Development and Relation between the Industry and Agriculture Sectors:

The Chinese Planning Economy Revisited in Cliometrics

Sun Shengmin(The Center of Economic Research, Shandong University)

Abstract:There are some mistakes in dealing with the relation between the industry and the agriculture sectors during the period of Chinese planning economy. China¡¯s heavy-industry development strategy with the support of agriculture is maybe right, the method adopted by the nation  is maybe wrong. In the paper, we find that the efficiency in agriculture was low and the industrial elite also didn¡¯t get the more benefits from the agriculture sector during the Commune System. Experiential analysis based on the Cliometrics supports the conclusion. If the cooperative economy that existed from 1952 to 1956 were carried out from 1957 to 1978, the gross value of agricultural output would increase 1/3 at least, and the tax of the agriculture sector taking out by the government in order to develop the industry sector would increase 1.8% or 8.0% at least. The lost of social saving in the Commune System is double to the benefits of industry transferring from the agriculture in fact. We also make clear why the household responsibility system leads to the reform in 1978.

Key Words: Relation Between the Industry and Agriculture Sectors; Institution; Adjustment Failure; Cliometrics

JEL Classification:N55£¬ Q15£¬ Q18