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Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?

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  • Shumei Gao and Mark E. Schaffer
  • Shumei Gao and Mark E. Schaffer
Abstract
This paper makes some selective comparisons of the empirical evidence relating to financial discipline and soft budget constraints in the enterprise sector in China and the transition countries of Central and Eastern Europe and the former Soviet Union (CEEFSU). The paper finds that: (1) in both CEEFSU countries and China, budgetary subsidies have fallen as prices have been liberalized, and the budgetary subsidies which remain are not clear evidence of soft budget constraints; (2) firms in both CEEFSU countries and China typically impose hard budget constraints on each other; levels of trade credit in China were roughly constant in 1994-96, implying inflows have approximately equaled outflows, i.e. inter-enterprise debts are being paid; the level of total trade credit observed in China, at about 20-25% of GDP, is similar to that observed not only in CEEFSU countries but also in developed Western economies; (3) in a comparison of bank financing of Chinese and Hungarian firms, Chinese banks were providing poorly-performing firms with new financing, whereas in Hungary, banks were reducing their exposure to bad firms; and (4) tax arrears in CEEFSU economies have emerged as a major source of soft budget constraints in recent years, but enterprise-level data for China show that as of the early 1990s, tax arrears were not an important source of financing for loss-making Chinese firms.

Suggested Citation

  • Shumei Gao and Mark E. Schaffer & Shumei Gao and Mark E. Schaffer, 1998. "Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?," William Davidson Institute Working Papers Series 124, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:1998-124
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    References listed on IDEAS

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    1. M Belka & S Estrin & M Schaffer & I.J. Singh, 1995. "Enterprise Adjustment in Poland: Evidence from a Survey of 200 Private," CEP Discussion Papers dp0233, Centre for Economic Performance, LSE.
    2. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    3. G. Alfandari & M.E. Schaffer, 1996. ""Arrears" in the Russian Enterprise Sector," CERT Discussion Papers 9608, Centre for Economic Reform and Transformation, Heriot Watt University.
    4. Perotti, E. C., 1998. "Inertial credit and opportunistic arrears in transition," European Economic Review, Elsevier, vol. 42(9), pages 1703-1725, November.
    5. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March.
    6. Bonin, J. P. & Schaffer, M. E., 1995. "Banks, firms, bad debts and bankruptcy in Hungary 1991-4," LSE Research Online Documents on Economics 20764, London School of Economics and Political Science, LSE Library.
    7. Cornelli, F. & Portes, R. & Schaffer, M., 1996. "The Capital Structure of Firms in Central and Eastern Europe," DELTA Working Papers 96-05, DELTA (Ecole normale supérieure).
    8. Schaffer, Mark E, 1995. "Government Subsidies to Enterprises in Central and Eastern Europe: Budgetary Subsidies and Tax Arrears," CEPR Discussion Papers 1144, C.E.P.R. Discussion Papers.
    9. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    10. Zou, Liang & Sun, Laixiang, 1996. "Interest Rate Policy and Incentives of State-Owned Enterprises in the Transitional China," Journal of Comparative Economics, Elsevier, vol. 23(3), pages 292-318, December.
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    Cited by:

    1. Kornai, János & Maskin, Eric & Roland, Gérard, 2022. "A puha költségvetési korlát - I [The soft budget constraint I]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 75-93.
    2. Micael Castanheira, 2003. "Public finance and the optimal speed of transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 435-462, September.
    3. Lubomír Lízal & Jan Svejnar, 2002. "Investment, Credit Rationing, And The Soft Budget Constraint: Evidence From Czech Panel Data," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 353-370, May.
    4. Alexandra Reppegather & Manuela Troschke, 2006. "Graduelle Transformation von Wirtschaftsordnungen: Ein Vergleich der Reformstrategien Chinas und Usbekistans," Working Papers 260, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
    5. Hongbin Li & Weiying Zhang & Li-An Zhou, 2005. "Ownership, Efficiency, and Firm Survival in Economic Transition: Evidence from a Chinese Science Park," Discussion Papers 00008, Chinese University of Hong Kong, Department of Economics.
    6. Changlin Luo, 2014. "Questioning the Soft Budget Constraint," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 403-412, May.
    7. Qi Quan & N. Huyghebaert, 2004. "Privatization. Issues at Stake in the Case of China," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 647-687.
    8. Jihe Song & Shumei Gao, 2000. "A Model of Budget Constraint and Enterprise Restructuring," CERT Discussion Papers 0001, Centre for Economic Reform and Transformation, Heriot Watt University.
    9. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    10. Kornai, János, 2000. "A költségvetési korlát megkeményítése a posztszocialista országokban [Hardening of the budget constraint in the post-socialist countries]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 1-22.
    11. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.

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    More about this item

    Keywords

    soft budget constraint; transition economies; China; trade credit; bad debt; tax arrears;
    All these keywords.

    JEL classification:

    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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