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

CERT Discussion Paper 98/1

24 Pages Posted: 15 Mar 1998

See all articles by Shumei Gao

Shumei Gao

Heriot-Watt University

Mark E. Schaffer

Heriot-Watt University - Centre for Economic Reform and Transformation; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: February 1998

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 pool 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.

JEL Classification: P31, P34, G21, G30

Suggested Citation

Gao, Shumei and Schaffer, Mark E., Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare? (February 1998). CERT Discussion Paper 98/1, Available at SSRN: https://ssrn.com/abstract=67228 or http://dx.doi.org/10.2139/ssrn.67228

Shumei Gao

Heriot-Watt University ( email )

Riccarton
Edinburgh EH14 4AS, Scotland EH14 1AS
UNITED KINGDOM

Mark E. Schaffer (Contact Author)

Heriot-Watt University - Centre for Economic Reform and Transformation ( email )

School of Management - Department of Economics
Edinburgh EH14 4AS
United Kingdom
+44 131 451 3494 (Phone)
+44 131 451 3008 (Fax)

HOME PAGE: http://www.hw.ac.uk/ecoWWW/cert

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
492
Abstract Views
2,235
rank
79,516
PlumX Metrics