Financial Friction,Firm Heterogeneity And China’s Economic Fluctuation

The 2008 global financial crisis not only dragged the world economy into recession,but also broke the overconfidence of the academic and policy circles,forcing them to re-examine critically the impact of various types of financial frictions in the financial system on the operation of the real economy.The financial crisis also caused a huge impact on China’s economy and ended China’s high-speed growth of up to double digits.Although the fiscal stimulus of "four trillion investments" and the loose monetary environment have effectively curbed the rapid decline in the growth rate of the China’s economy caused by the impact of the external environment,the overly powerful policy stimulus has also brought about some negative effects.The structural and institutional problems that have always existed have not only failed to properly resolve but have been further strengthened.The budget soft-constrained departments such as local governments and state-owned enterprises added large-scale levers,resulting in serious overcapacity,declining corporate profits,and a rapid increase in macro-leverage.China’s economic growth has entered the L-shaped new normal.Since the Party’s 18th National Congress,the Party Central Committee with Xi Jinping as General Secretary has accurately grasped China’s basic national conditions,made the major strategic judgement that China’s economic development has entered a"new normal" based on the phased characteristics of China’s economic development in 2014.In the 11th meeting of the Central Financial Leadership Group held in November 2015,Xi Jinping put forward the promotion of "supply-side structural reform".With the in-depth advancement of supply-side structural reform,economic structure has continued optimizing,the five main tasks have achieved remarkable results.Based on the latest developments in macroeconomic theories since the global financial crisis,we have refined three major characteristics or elements of China’s economy based on the fact that China’s economy has entered the new normal and pushed forward the supply-side structural reforms.Financial frictions:There is information asymmetry in the credit market.Enterprises are subject to external finance premiums when they lend from banks,and thus generating financial accelerator effect.Implicit guarantees:State-owned enterprises have implicit guarantees for their debts,resulting in budget soft-constraints and a significant advantage over private-owned enterprises in the credit market,causing a mismatch in credit resources.Firm heterogeneity:The "dual economic structure" in which both state-owned and private-owned enterprises coexist in China,has caused deep structural conflicts.The above three characteristics or elements are gradually incorporated into the DSGE models of the current mainstream macroeconomic analysis paradigm.Using theoretical analysis and numerical simulation methods,the roles and influence mechanisms of these characteristics or elements on major macroeconomic variables are analyzed in detail.On the above basis,we will explore the optimal policies for promoting medium and long-term economic growth or stabilizing short-term economic fluctuations.We find that:(1)The introduction of financial friction in the model will produce a financial accelerator effect,which will have an amplified and propagated effect on the economy responding to exogenous shocks,and will,to a certain extent,be positive for promoting market clearing and reshaping the economic structure.(2)The introduction of implicit government guarantees in the model will cause state-owned enterprises’ budget soft-constraints,then obscure the company’s real risks,distort financing prices,cause resource mismatches,delay market clearance,and aggravate structural conflicts in the economy.In addition,when the economy suffers unfavorable exogenous shocks,the government’s implicit guarantee for state-owned enterprises can enhance its ability to withstand risks and carry out the bottoming of the economy.The higher the guarantee ratio,the better the stimulating effect.However,the negative effects will increase,which will eventually lead to a series of problems such as rising inventory,overcapacity,and excessive leverage.(3)The introduction of firm heterogeneity in the model will portray the "dual economic structure" of the coexistence of state-owned and private-owned enterprises in China’ s economy.The adjustment of economic structure will have an impact on the medium and long-term economic growth.The decline in the proportion of inefficient state-owned enterprises can effectively increase the total factor productivity of the overall economy.There are significant crowding-out effects between state-owned enterprises and private-owned enterprises.The influence of total factor productivity impact under different economic structures is also different.Increasing the proportion of high-efficiency private-owned enterprises helps to increase the efficiency of resource utilization in the overall economy and correct misallocation of resources.(4)The introduction of price stickiness,government’s fiscal policy and central bank’s monetary policy in the model will provide space for the research and discussion of macro-control policies.The impact of fiscal policies and monetary policies on state-owned enterprises and private-owned enterprises is asymmetric,and the effects of fiscal policies and monetary policies under different economic structures are also different.Decreasing the proportion of low-efficiency state-owned enterprises and increasing the proportion of high-efficiency private-owned enterprises in the economy will help enhance the fiscal and monetary policy effects and expand the operational space for macro-control policies.Based on the above research conclusions,we propose three targeted and constructive policy recommendations:(1)deepen the reform of state-owned enterprises and increase the production efficiency of the state-owned enterprises;(2)improve the market economic system,support the development of private-owned enterprises,and stimulate the vitality of all kinds of market entities;(3)push forward the supply-side structural reform and implement structural fiscal and monetary policies.