Reflections on the Microeconomic Basis for Soft Budget Constraint in the Market Economy

Historical analysis of the market economy indicates that soft budget constraint is becoming increasingly pervasive and broad-rooted. Using an analysis of micro-level entities in the market economy, this paper describes how soft constraint derives from interdependence among corporations, banks, and the government. Soft constraint is explained in relation to changes in concentrated shareholding ownership, the increasing dominance of the financial sector, and financial insurance. We conclude： 1） concentrated shareholding ownership and institutionalized soft budget constraint create sub-optimal allocation of resources in the market economy; 2） neoclassical microeconomic principles cannot explain the economic actions of organizations in the market economy and should be revised; 3） externalities associated with soft budget constraint have spread across the globe to become both the cause and primary effect of cyclic global financial and economic crises. Hence, the government, banks, and the corporate sector must work together to overhaul supervisory mechanisms. On a global level, governments must collaborate to build a new international economic order. Correcting imbalances in international reserve currencies and fortifying administration of cross-national economic organizations will mitigate the effects of soft budget constraint.

The state capital investing and operating company pilot reform and SOE bailouts

This paper explores the influence of the State Capital Investing and Operating Company(SCIOC)pilot reform on SOE bailout using a staggered differencein-differences model.Based on a sample of listed SOEs during 2011-2018,we find that when the real controllers of listed SOEs enter the list of SCIOCs,soft budget constraints are alleviated and listed subsidiaries are less likely to become distressed.Mechanism tests indicate that SCIOCs help distressed firms through exiting the market,reducing bank loans,enhancing corporate governance,and improving operating efficiency.Heterogeneity tests show that the effect of SCIOC establishment is more significant in central and western regions,in public welfare and special function industries,for central SCIOCs,for state capital investing companies,when firms are organized in more layers,and for firms that engage in M&As.The empirical results show that the implementation of SCIOCs benefits both micro-enterprise development and state capital layout optimization.

WTO,credible commitments,and China’s reform of state-owned enterprises

This study focusses on the relationship between China’s accession to the World Trade Organisation(WTO)and its reform of stateowned enterprises(SOEs)and suggests that the major incentive for the Chinese government to join the WTO is to promote economic reforms through overcoming domestic obstacles.After other options such as decentralisation,legalisation,and privatisation failed to enhance viability of SOEs,the Chinese government began to rely on international institutions to enhance its credibility and harden the budget constraints on SOEs.The WTO is one of the most important international organisations and has binding force for its member states.China’s participation in the WTO will effectively harden budget constraints on its SOEs and improve the efficiency of these enterprises through introducing competition into the domestic market.Historical data support our argument and indicate that China has effectively enhanced the credibility of government commitments and promoted the reform of its SOEs since its accession to the WTO.

Urban wage inequality:The reform of state-owned enterprises in China’s great transition

Along with the further reforms of state-owned enterprises(SOEs),urban China has experienced an evident increase in wage inequality.Using provincial-level data for the period 1993–2013 and individual-level data from five waves of the China Household Income Project from 1988 to 2013,this paper investigates how the SOE reform affects wage distribution in urban China by considering three mechanisms:wage determination,ownership structure and institutional segmentation.The results of this study show that overall inequality increased with the reduction of SOEs’share in the economy.Moreover,through a detailed Oaxaca–Blinder re-centred influence function decomposition,this experiment obtains consistent and robust results.Based on the theory of soft budget constraint,this study demonstrates that the increase in urban wage inequality has been mainly caused by wage structure effects.Since the SOE reform in the 1980s,the wage determination mechanism has changed with the increase in the return of the labour force to education.During this period,institutional segmentation was of less significance in explaining the wage gap between SOEs and non-SOEs.Furthermore,the accelerating ageing process of China’s population had no significant effects on the trajectory of urban wage inequality throughout this period.