Guest Editor’s Introduction

China has experienced tremendous economic growth in the past three decades as a result of economic reform moving toward a market economy. Prior to that, the Chinese economy suffered from political instability and a planned economy, especially during China’s Cultural Revolution. In spite of the economic growth, there are many social issues that need to be addressed. For instance, current pollution levels adversely affect the Chinese standard of living. Another issue concerns competition across local governments and it may prevent further market-oriented reform. We are also trying to understand how emerging finance development will play an increasingly important role in the current economy. Microfinance, which attempts to alleviate poverty, is a newly introduced concept in China. Studying the structure and productivity of this new industry is very important.

These new and interesting issues need to be studied in relation to past reforms implemented in China. It’s important to understand what happened during those periods and find the logistic relationship between these phenomenon and economic growth. In this issue of The Chinese Economy, we will discuss those topics just mentioned.

The first article, “The Immiserizing Growth During the Period of China’s Cultural Revolution” by Gene Chang, Shenke Yang, and Kathryn Chang, analyzes the Chinese Cultural Revolution（CR）during the period 1966–1976 and offers two contrasting views regarding the revolution. The authors use period end market prices to calculate the GDP growth during the CR period. They use the market prices of Chinese products as a proxy for market prices that reflect the opportunity cost of production. By assuming that the data are reliable in a model of “immiserizing growth,” the authors try to explain the contradiction between the deterioration of the population material well-being and the positive growth of the national economy. The empirical test shows that the Chinese economy has experienced immiserizing growth during the CR period. In addition, the authors found that if utility falls in the growth process, the GDP measured by market prices at the end of the period would also fall.

The second article, “Examining the Inter-regional Pollution Spillover: Evidence from Visibility in China” by Zhigang Li, Jia Yuan, Frank Song, and Shangjin Wei, estimates the long-range air pollutant spillover effect of the Pearl River Delta (PRD) region, one of the most important manufacturing centers in China from 1983 to 2006. Using a Granger-causality model and taking daily visibility as a proxy of air pollution levels, the authors find that a 10% increase in the local pollution intensity can increase the pollutant intensity of a region 1,000 km away by over 1%. This means the air pollution of China has strong spillover effects. In addition, the spillover effect of the air pollution has increased along with rapid economic growth.

The third article, “The Border Effects of Domestic Trade in Transitional China: Local Governments’ Preference and Protectionism” by Yongliang Zhao and Jinlan Ni, interprets the regional trade barriers in China by using a two-region border effect model. After economic reform began in 1978, China turned to a market-oriented economy that ushered in new competition among the provinces. The authors extend the traditional border effect model of international trade to a two-region border effect model of domestic trade. By using the statistics yearbooks of provinces from 1997 to 2010, the authors find the determinants of border effects, which are significantly different between eastern areas of China and western areas. They also noted that firms with different ownership will experience different situations when facing border effects, as well as the influence on border effects.

The fourth article, “Evaluating Productivity of Chinese Microfinance Institutions: A Malmquist Approach” by Md Aslam Mia, Miao Zhang, Rajah Rasiah, and A.S.A Ferdous Alam, analyzes the productivity of China’s Microfinance Institutions (MFIs) from 2010 to 2012. Using output-oriented Malmquist, the authors calculate the productivity of China’s MFIs from 2010 to 2012, and find that, although Technical Efficiency Change (TEC) has improved over these two years, Technological Change (TC) declined and became the main cause of decrease of Total Factor Productivity (TFP). Moreover, the authors find that new technology and service innovations can stimulate the increase of China’s MFIs and those innovations could accelerate MFI productivity increase in the future.

The last article, “Determinants of Board Composition and Corporate Governance in Chinese Enterprises Since Reforms Began: A Comparison of Controlling Shareholders” by Zhang Cheng, Rajah Rasiah, and Cheong Kee Cheok, studies the determinants of board composition and tries to find differences in the behavior of Chinese companies before and after the split-share structure reform. Using 444 nonfinancial firms existing from 2000 to 2012, the authors propose several hypotheses and find that: board size and board independence are significantly determined by firm size as well as other factors such as cost (measured by Tobin Q), benefit (measured by Herfindahl-Hirschman Index [HHI], etc.), and governance and CEOs’ behaviors. After economic reforms were launched in 1978, the change in ownership caused a change in some determinants. Basically, the board size of central government and market-oriented state enterprises depend more on firm size than that of private firms. However, private- and market-oriented state enterprises consider the cost of board monitoring more than do local government firms.