Examining the Liquidity and Productivity Relationship: Evidence from Post-reform China

35 Pages Posted: 24 Jun 2020

See all articles by Tianyu Wang

Tianyu Wang

affiliation not provided to SSRN

Kui-Wai Li

Munk School of Global Affairs, University of Toronto

Date Written: May 31, 2018

Abstract

A loose financial policy through the provision of loans and fiscal subsidies to state-owned enterprises and households has long been practiced in China, though financial liberalization since the 1980s has revitalized banks and other institutions. By using provincial data, this paper attempts to show the relationship between liquidity and productivity in post-reform China. China’s total factor productivity growth is estimated by the Malmquist index. A total of four regression models have been employed and the findings support the inverse relationship between liquidity and productivity, especially since 2008. China’s loose financial policy that promoted “cash-richness” must be reexamined as excessive liquidity coexisted with decline in total factor productivity. An increase of 1% in liquidity would result in about 0.6% loss in total factor productivity due to market distortion.

Keywords: Total Factor Productivity, Excess Liquidity, Subsidies, China

JEL Classification: E65, G28, N25, O47, O54, P34

Suggested Citation

Wang, Tianyu and Li, Kui-Wai, Examining the Liquidity and Productivity Relationship: Evidence from Post-reform China (May 31, 2018). Available at SSRN: https://ssrn.com/abstract=3616532 or http://dx.doi.org/10.2139/ssrn.3616532

Tianyu Wang

affiliation not provided to SSRN

Kui-Wai Li (Contact Author)

Munk School of Global Affairs, University of Toronto ( email )

Toronto
Canada

HOME PAGE: http://https://kw-consultancy.com/

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