Bulletin of Monetary Economics and Banking, Vol. 21, No. 1 (2018), pp. 23 - 32
FINANCIALIZATION AND STAGNANT CAPITAL
ACCUMULATION IN CHINA
Guanchun Liu1,
1School of Public Economics & Administration, Shanghai University of Finance &
Economics, Shanghai, P.R. China. Email: liuguanchun1@126.com
2Department of Finance, National Sun
cclee@cm.nsysu.edu.tw
ABSTRACT
Using a
Keywords: Financialization; Capital accumulation; Polynomial inverse lag; China.
JEL Classifications: D21; E22; G11.
Article history: |
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Received |
: March 2, 2018 |
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Revised |
: May 25, 2018 |
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Accepted |
: July 24, |
2018 |
Available online : July 31, |
2018 |
https://doi.org/10.21098/bemp.v21i1.941
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I. INTRODUCTION
Financialization is a recent concept refers to a broad range of phenomena, including the globalization of financial markets, the shareholder value revolution and the rise of incomes from financial investment (Stockhammer, 2004). In this paper, financialization is defined as the increasing trend of financial profit obtained by
As the largest developing country, China has been growing rapidly at a rate of 10% before 2010, but economic growth declined since 2010 with a rate of 6.9% in 2015. As the driving force behind growth, real investment in China during the period
Invest |
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Financialization |
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0.060 |
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0.300 |
0.050 |
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0.250 |
0.040 |
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0.200 |
0.030 |
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0.150 |
0.020 |
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0.100 |
0.010 |
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0.050 |
0.000 |
Invest |
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Broad Financialization |
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Narrow Financialization |
0.000 |
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2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
Figure 1. Financialization and Real Investment over
The portfolio choice between financial and real investments is not a new topic in the economics literature. On the one hand, depending on the respective rate of return, firms decide to allocate their portfolios between real and financial investments, and hence there is a substitution effect between real and financial assets (Tobin, 1965; Tornell, 1990). On the other hand,
In practice, most research studies support the theory of substitution effect, but they only care about the
Financialization and Stagnant Capital Accumulation in China |
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level data, Stockhammer (2004), Orhangazi (2008), and Demir (2009) find that financialization has a negative and significant impact on capital accumulation, while Kliman and Williams (2005) point out that financialization is not the reason for productive investment.
In this study, we examine the effects of financialization on China’s capital accumulation across time horizons, through performing the traditional regression and the Polynomial Inverse Lag (PIL) procedure borrowed from Mitchell and Speaker (1986). Our findings reveal that the instant impact of financialization on real investment starts negative but reverts to be positive after 9 years, and the cumulative effect presents a
II. DATA AND METHODOLOGY
Given the highly liquid nature of financial investments, a better choice would be to use quarterly data (Demir, 2009). In this paper, we utilize the
Following Chaney et al. (2012), we consider the following model:
(1)
where Inv denotes firm real investment, using the sum of cash paid for the acquisition of fixed and intangible assets as well as other
Following Arrighi (1994), we use two indicators for firm’s financialization, namely Fps1 and Fps2, which represent the broad and narrow definitions. Specifically, broad financial profit is defined as the sum of earnings from fair value changes and income from other financial operations. Considering the fact that investment for joint ventures does not flow into financial assets directly, narrow financial profit equals broad financial profit minus earnings from joint ventures.
To investigate the effects of financialization on the firm investment across time horizons, the PIL framework of Mitchell and Speaker (1986) is considered:
(2)
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where
(3)
Set n=7 and m=9, the simplified version of PIL method can be written as:
(4)
Then, we can obtain the instant effect ωj and the cumulative effect ∑ωj of financialization on real investment over different time horizons.
III. EMPIRICAL RESULTS
We estimate Eq. (1) by employing a system Generalized Method of Moments (GMM) estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998). Following Brown and Petersen (2011), we treat all financial variables (including Fps, Lev, Roe, and Cfo) as potentially endogenous and use lagged levels dated
Table 1 presents the estimation results based on Eq. (1) and robust standard errors are provided to obtain
Financialization and Stagnant Capital Accumulation in China |
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Table 1.
The Effects of Financialization on Real Investment
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Broad Financialization (Fps1) |
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Narrow Financialization (Fps2) |
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OLS |
GMM |
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OLS |
GMM |
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0.3475*** |
0.3443*** |
0.4767*** |
0.4262*** |
0.3471*** |
0.3441*** |
0.4760*** |
0.4258*** |
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(0.0095) |
(0.0092) |
(0.0079) |
(0.0088) |
(0.0095) |
(0.0092) |
(0.0079) |
(0.0088) |
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(0.0002) |
(0.0002) |
(0.0003) |
(0.0003) |
(0.0002) |
(0.0002) |
(0.0003) |
(0.0003) |
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(0.0003) |
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(0.0007) |
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(0.0003) |
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(0.0007) |
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0.0138*** |
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0.0131*** |
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(0.0025) |
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(0.0034) |
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(0.0025) |
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(0.0034) |
Sizeit |
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0.0033*** |
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0.0035*** |
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0.0033*** |
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0.0034*** |
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(0.0009) |
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(0.0006) |
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(0.0009) |
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(0.0006) |
Tqit |
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0.0014*** |
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0.0001 |
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0.0014*** |
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0.0001 |
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(0.0003) |
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(0.0002) |
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(0.0003) |
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(0.0002) |
Cfoit |
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0.0264*** |
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0.0979*** |
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0.0263*** |
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0.0978*** |
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(0.0038) |
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(0.0055) |
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(0.0037) |
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(0.0055) |
Obs. |
27866 |
27866 |
27866 |
27866 |
27866 |
27866 |
27866 |
27866 |
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R2 |
0.3104 |
0.3155 |
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0.3108 |
0.3157 |
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AR(2) |
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0.219 |
0.216 |
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0.254 |
0.215 |
Hansen |
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0.741 |
0.648 |
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0.632 |
0.699 |
Notes: All specifications use firm and year fixed effects and cluster observations at firm level; Robust standard errors are in parentheses; Constant terms are not reported; *, ** and *** refer to significance at 10%, 5% and 1% levels, respectively; All tests are given by their
Further, to explore the heterogeneous effects of financialization on real investment for firms with different types, Table 2 takes disaggregation by firm size and ownership a step further and reports the estimation results. Obviously, the roles of financialization are sensitive to firm size and ownership. As for small and private firms, the coefficients of financialization are larger than those of large and
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Table 2 |
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Heterogeneous Effects of Financialization on Firms’ Real Investment |
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Firm Size |
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Ownership |
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Large |
Small |
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Private |
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Broad |
Narrow |
Broad |
Narrow |
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Broad |
Narrow |
Broad |
Narrow |
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0.4516*** |
0.4516*** |
0.3904*** |
0.3896*** |
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0.4429*** |
0.4427*** |
0.4096*** |
0.4083*** |
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(0.0141) |
(0.0141) |
(0.0109) |
(0.0109) |
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(0.0118) |
(0.0118) |
(0.0124) |
(0.0124) |
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(0.0004) |
(0.0004) |
(0.0003) |
(0.0004) |
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(0.0003) |
(0.0003) |
(0.0005) |
(0.0006) |
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(0.0010) |
(0.0010) |
(0.0006) |
(0.0006) |
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(0.0008) |
(0.0008) |
(0.0010) |
(0.0010) |
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0.0077*** |
0.0058** |
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0.0045 |
0.0022 |
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(0.0066) |
(0.0066) |
(0.0026) |
(0.0027) |
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(0.0042) |
(0.0042) |
(0.0047) |
(0.0048) |
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Sizeit |
0.0060*** |
0.0060*** |
0.0020*** |
0.0019** |
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0.0037*** |
0.0037*** |
0.0022** |
0.0021** |
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(0.0011) |
(0.0011) |
(0.0008) |
(0.0008) |
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(0.0007) |
(0.0007) |
(0.0010) |
(0.0010) |
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Tqit |
0.0001 |
0.0001 |
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0.0002 |
0.0002 |
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(0.0005) |
(0.0005) |
(0.0003) |
(0.0003) |
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(0.0003) |
(0.0003) |
(0.0004) |
(0.0004) |
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Cfoit |
0.1264*** |
0.1266*** |
0.0716*** |
0.0712*** |
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0.1219*** |
0.1219*** |
0.0760*** |
0.0757*** |
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(0.0085) |
(0.0085) |
(0.0069) |
(0.0069) |
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(0.0076) |
(0.0076) |
(0.0084) |
(0.0084) |
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Obs. |
12496 |
12496 |
15370 |
15370 |
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15626 |
15626 |
12240 |
12240 |
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AR(2) |
0.173 |
0.168 |
0.133 |
0.145 |
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0.166 |
0.159 |
0.137 |
0.130 |
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Hansen |
0.699 |
0.725 |
0.727 |
0.569 |
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0.609 |
0.718 |
0.791 |
0.788 |
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Notes: Same as Table 1.
Finally, with the PIL framework, the instant and cumulative effects of financialization on real investment are plotted in Figure 2. In particular, the negative instant impact converges to zero at first 4.5 years and then reverts to be positive, while the cumulative effect manifests a
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(A) Full Sample
0.002 |
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Instant Effect |
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Cumulative Effect |
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(b) Large Size Firms
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Instant Effect |
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Figure 2. The Instant and Cumulative Effects of (Broad)
Financialization on Real Investment
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(c) Private Firms
0.006 |
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0.004 |
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0.002 |
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Instant Effect |
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Cumulative Effect |
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Figure 2. The Instant and Cumulative Effects of (Broad)
Financialization on Real Investment (Continued)
In order to test for the robustness of previous conclusions, the following sensitivity tests are conducted: (i)
(ii)repeating the estimations using a balanced firm data; (iii) adding more micro and macro control variables; and (iv) dropping the data associated with negative financial profit from the sample. In all these cases, the robustness estimation results are not much dissimilar to those reported.
IV. CONCLUSIONS
In this paper, we investigate the role of financialization in explaining China’s stagnant capital accumulation. The results show that increased financial profit significantly reduces real investment, especially for small and private firms. Also, the effect of financialization on real investment is shown to be nonlinear, and manifests a
REFERENCES
Arellano, M., and Bover, O. (1995). Another look at the
Arrighi, G. (1994). The Long Twentieth Century: Money, Power, and the Origins of Our Times. London: Verso Press.
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Blundell, R., and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1),
Brown, J.R., and Petersen, B.C. (2011). Cash holding and R&D smoothing. Journal of Corporate Finance, 17(4),
Chaney, T., Sraer, D., and Thesmar, D. (2012). The collateral channel: How real estate shocks affect corporate investment. American Economic Review, 102(6),
Demir, F. (2009). Financial liberalization, private investment and portfolio choice: Financialization of real sectors in emerging markets. Journal of Development Economics, 88(2),
Kliman, A., and Williams, S. (2015). Why ‘financialization’ hasn’t depressed U.S. productive investment? Cambridge Journal of Economics, 39(1),
Lazonick, W., and O’Sullivan, M. (2000). Maximizing shareholder value: A new ideology for corporate governance. Economy and Society, 29(1),
Mitchell, D.W., and Speaker, P.J. (1986). A simple, flexible distributed lag technique: The Polynomial inverse lag. Journal of Econometrics, 31(3),
Orhangazi, Ö. (2008). Financialisation and capital accumulation in the non- financial corporate sector: A theoretical and empirical investigation on the US economy:
Smith, C.W., and Stulz, R.M. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20(4),
Stockhammer, E. (2004). Financialization and the slowdown of accumulation. Cambridge Journal of Economics, 28(5),
Tobin, J. (1965). Money and economic growth. Econometrica, 33(4),
irreversibility distortion? Journal of Development Economics, 32(2),
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