SummaryLaw finance and economic growthin China.docx

1、SummaryLaw finance and economic growthin ChinaMid-term reportSummary for “Law, finance, and economic growth in China”a) A cover letter of the paperDear editor,We would like to submit the enclosed manuscript entitled Law, finance, and economic growth in China. Below are our responses to your submissi

2、on questions.1. Title and the central theme of the articlePaper title: “Law, finance, and economic growth in China. This paper compares Chinas formal systems of law and finance and governing mechanisms with other developed and emerging countries. And they find that Chins is an important counterexamp

3、le to the findings in the law, institutions, finance, and growth literature. Neither its legal nor financial system is well developed, yet it has one of the fastest growing economies. After examining the Stated, Listed and Private Sectors, they find the Private Sector grows much faster than the othe

4、rs and provides most of the economys growth. The imbalance among the three sectors suggests that alternative financing channels and governance mechanisms, such as those based on reputation and relationships, support the growth of the Private Sector.2. The part addressed excellentI believe that four

5、aspects of this manuscript will make it excellent. First, the title is very common, but the content is new to readers and researchers. Second, the structure framework is wonderful and clear. Third, Panel Data applies well in the paper. Final, the conclusion implies that there are important factors c

6、onnecting law, institutions, finance, and growth not well understood. A better understanding of how these nonstandard mechanisms work to promote growth can shed light on optimal development paths not only for China, but also many other countries.3. Name, fax and email address of the corresponding au

7、thorAuthors: Franklin Allen, Jun Qian, Meijun QianTel.: +1215 898 3629-fax: +1215 573 2207E-mail address: allenfwharton.upenn.edu (F. Allen).Finally, this paper is original unpublished work and it has not been submitted to any other journal for reviews. Sincerely yours,b) The main conclusion Recentl

8、y several related literature on law, institutions, finance, and economic growth have emerged in financial economics. However, China is different. This paper compares Chinas formal systems of law and finance and the alternative institutional arrangements and governing mechanisms with other developed

9、and emerging countries. And the authors examine the relation between the development of these systems and China economic growth. With one of the largest and fastest growing economies in the world, China differs from most of the countries studied in the law, institutions, finance, and growth literatu

10、re, and is an important counterexample to the existing findings: Its legal and financial systems as well as institutions are all underdeveloped, but its economy has been growing at a very fast rate. After examining three sectors of the Chinese economy, the lawfinancegrowth nexus established by the e

11、xisting literature works well for the State and Listed sectors. With poor legal protection of minority and outside investors, (standard) external markets are weak, and the growth of these firms is slow or negative. However, the size, growth, and importance of these two sectors in the economy are dom

12、inated by those of the Private Sector. In spite of relatively poorer applicable legal protection and standard financing channels, the Private Sector has been growing much faster than the others and has been contributing to most of the economys growth. The system of alternative mechanisms and institu

13、tions, such as those based on reputation and relationships, plays an important role in supporting the growth in the Private Sector, and they are good substitutes for standard corporate governance mechanisms and financing channels. The results on the differences among the three sectors in China chall

14、enge the view supporting the lawfinancegrowth nexus. Moreover, the success of the Private Sector in China also challenges the view that property rights and the lack of government corruption are crucial in determining financial and economic outcomes. Although the results are based on China, similar s

15、ubstitutes based on reputation and relationships may be behind the success of other economies as well, including developed economies. At the same time the results have general implications: there are important factors connecting law, institutions, finance, and growth not well understood. A better un

16、derstanding of how these nonstandard mechanisms work can still be researched in depth.c) Policy implications of the research In this paper the authors have already examined three sectors in the economy and find the Private Sector has been growing much faster than the others, contributing to most of

17、the economic growth. Then what the government should do to continue promoting Private Sector growth? Besides, China has realized economic growth under weak legal and financial system, then if China can take actions to improve legal and financial system, can the economic grow faster? What the policy

18、implies in the paper? I make the following policy recommendations in view of the current situation in China.1. Increase financial support and expand the funding sources In this paper, I find local government plays an important role in the development of Private Sector. Alternative financial channels

19、 and governance mechanisms replace standard corporate mechanisms. To continue accelerating the development of the Private Sector, the government should increase financial and funding support and make the corresponding preferential policies to support the Private Sector, as well as Stated and Listed

20、Sector.2. Develop the local finance and private finance actively and steadily The regions should actively promote more financial innovation strategy, making the operation of the financial system more closely with local economic development. Support from financial institutions promotes various SMEs i

21、n the regional economic development, thus contributing to regional employment and adding strong vitality to the local economic. Meanwhile, development and growth of SMEs have also increased the size of financial institutions, providing support for expanding business and creating basis conditions for

22、 increasing operating income.3. Relieve financial constraints and emphasize the role of market The government should regulate the development of financial institutions using market mechanisms, promote various financial institutions and financial intermediaries vigorously and increase the efficiency

23、of financial system. Meanwhile government reduces governments financial intervention, strengthen the market mechanism and create the conditions for financial development through the financial system innovation. d) Methods, especially the empirical methods used In this paper, authors dont apply lots

24、of complex tests or models. I think the methods used are mainly two. Next I will list followed in detail.1. Comparative analysis I think one of the features in this paper is a large number of applications of comparative analysis. Authors use comparative analysis in Section2, 3, 4 and 5. When analyzi

25、ng the legal and financial system, the authors dont show the data of China only, but compare China with other developed countries in the western. Meanwhile, to make the paper more persuasive, the authors compare with other emerging countries next. When researching on the development of the three sec

26、tors, they list the data from 1996 to 2002, using historical comparison. Next, authors study on the different importance of the financing channels in the three sectors respectively. Finally, they focus on the Private Sector. For the firms, authors compare the annual return in the past five years and

27、 next three years, the ownership and financial channels when startup and current. If they apply lots of models and conduct many complex tests, we may not understand. This comparative analysis also makes the idea clear and simple.2. Empirical methods In this paper, empirical methods mainly concentrat

28、ed on Section 4. The authors perform three different sets of empirical tests find similar results. Concrete empirical models are presented below.Method 1: “Synthetic firm” approachStep 1: Using the summary statistics from LLSV samples to create a “synthetic Firm” for each of the 33 countries. Each f

29、irm characteristic is equal to the median of the same variable. Following the same procedure, a synthetic firm is also created for China based on the information of 1,100+ firms.Step 2: Three OLS regressions are run on the 33 (LLSV countries) “synthetic” observations. The dependent variables in thes

30、e tests are: (1) dividend/earnings ratio;(2) dividend/sales ratio; and, (3) Tobins Q (measured by market-to-book assets ratio). The independent variables are the same ones used in LLSV. Based on the results from each of the three regressions, we then conduct an out-of sample prediction for China usi

31、ng the estimated coefficients and variances.Step 3: Compare the “true” (observed) firm characteristics of the Chinese synthetic firm to those predicted values from Step 2, and see whether the true value falls in the boundaries of predicted values.Method 2: “Alpha” approach-utilizing the alpha notati

32、on from asset pricing models There are two versions of this model: restricted and unrestricted, depending on whether we restrict the coefficients on each independent variable to be the same for Chinese firms and for firms in other countries. Method 2-1: Restricted Model Method 2-2: Unrestricted modelMethod 3: Firm level out-of-sample prediction Authors also perform firm-level out-of-sample predictions, based on the regression results from LLSV. The results are similar to the above two methods. Method 3 can actually be proven to be mathematically identica