A Study On Chinese Asset Shortage

Against a new round of global imbalances and world-wide recurrent asset bubble events since 1990s, Caballero (2006) thought that these stemmed mainly from emerging economies’ asset shortages, based on the "asset shortage" hypothesis. Inspired, Chen and Imam (2011,2012) demonstrated the above inference from the empirical levels, through building asset shortage index (referred to as "C-I Index") and in combination with multi-country panel data. Although Chen and Imam (2011, 2012) have done a lot of creative work, and made many valuable research results, however, the studies still have many deficiencies, in some aspects such as the specific settings for each statistical indicator of "C-I Index" and the introducing of variables when analyzing why emerging economies can produce persistent current account surpluses, asset bubbles, and asset shortages. In view of this, this paper will do a more systematic and deeper research, on how to measure Chinese asset shortage, and on why China can produce persistent trade/current account surplus, asset bubble, and asset shortage.When estimating the extent of Chinese asset shortage, this paper firstly does some specific settings for each statistical indicator in the "C-I Index" constructed by Chen and Imam (2011), on the basis of Caballero, Farhi, and Gourinchas (2006, 2008)’s explanation on the creation of financial assets, and then uses annual data to measure, in order to be able to measure easily the asset shortage in emerging economies, to avoid the seasonal interference brought by short-cycle data, and to avoid the defect inherent in seasonal adjustment methods. The study indicates that China has already entered the asset-shortage stage as early as 1997. Although the extent of China’s asset shortage was reversed during the two years 2002 and 2009, this originated mainly from additional project loans, from that micro-economic entities held additional short-term deposits, from that national savings increased slightly or even declined, and from that cross-border capital inflow was reversed. Further study shows that the indirect financing still occupies absolute dominance in our domestic financing structure. This is not only harmful to promoting the effective competition among the domestic financial sectors, but also to reducing systemic risk in the domestic banking system.When studying the relationship between asset shortage and trade/current account surplus, this paper, on the one hand, points out clearly that the asset shortage index, built by Chen & Imam (2011), is not the most appropriate indicator to be able to reveal why emerging economies will produce trade/current account surplus, based on the uncertainty existing in the course of the cross-border flow of funds, and combined with the relevant examples; on the other hand, deduces that unadjusted asset shortage index is the most appropriate indicator to be able to reflect why emerging economies will produce trade/current account surplus, based on the "asset shortage" hypothesis proposed by Caballero (2006) and on the national accounting principles. After that, combined with control-variables introduction and relevant economic data, this paper confirms further that the unadjusted asset shortage is also an important incentive causing that China produces trade/current account surplus, in addition to the home real exchange rate undervaluation, world economic growth, and other basic factors. Combined with the analysis for why the extent of unadjusted asset shortage can be reversed, this paper emphasizes that bond market development is not only beneficial to alleviate the extent of the unadjusted asset shortage in emerging economies, but also able to help to prevent the excessive accumulation of the risk in the banking system, when it suffers large negative exogenous shocks.When studying the relationship between asset shortage and asset bubble, this paper firstly builds a basic econometric model which can be used to test the relationship between asset shortage and asset bubble, based on the stochastic-bubble iterative model developed by Caballero and Krishnamurthy (2006) and on the relative theories, built by Samuelson (1958), Diamond (1965), Solow (1970), Feldstein (1976, 1977), and Tirole (1985), about the dynamic inefficiency and the relationship between dynamic inefficiency & rational bubble; and then expand further the basic econometric model, combined with the availability of data, and meeting the testability requirements of asset-bubble indicator. After that, this paper takes a different approach about whether to introduce economic growth and domestic-&-foreign risk-free real interest rates at the same time or not, and tests empirically the relationship between asset shortage & asset bubble in combination with Chinese economic data, in order to confirm that asset bubble is also a rational response to "dynamic inefficiency" existing in the emerging economies and to the shortage of stores of value faced by emerging economies. The Study indicates that the existence of asset shortage makes emerging economies easy to become fertile soil brewing asset bubbles under the environment of "dynamic inefficiency". Furthermore, the study also shows that because asset bubble itself contains a huge risk, pullback pressure always exists in the market, and that economic growth has a significant positive role in boosting asset bubble, and that large adverse external shocks can ease significantly the extent of asset bubble.When studying the reason of asset shortage, this paper firstly infers by modeling how qualitative relations to exist between the asset shortage and some variables such as the economic growth, financial Development, and real interest rates which Caballero, Farhi, and Gourinchas (2006,2008) emphasizes, as well as to exist between the asset shortage and some variables such as the income distribution, expected home real exchange rate, and foreign real interest rate which I emphasize, from the theoretical level. After that, this paper constructs the basic econometric model by introducing economic growth, financial development, and domestic real interest rate, based on the research perspectives of Caballero, Farhi, and Gourinchas (2006,2008); as well as does the further expansion for the basic econometric model, combined with my own understanding. On this basis, this paper does some empirical tests for the above inference, combined with relevant economic data. The study indicates that sustained-&-rapid economic growth and seriously-lagging-behind financial development are the most important factors that cause Chinese asset shortage. Income distribution, expected home real exchange rate, domestic real interest rate, and foreign real interest rate do not have significant explanatory powers, constrained by Gini coefficient’s poor data quality, interest rate controls, capital & finance account controls, and so on.Finally, this paper sorts out some relevant conclusions, and make a few personal views on the countermeasures, based on a deeper understanding for the study above.