2. PROBLEMS Return to Capital Remain High. Saving Rate Remain High. Foreign Surplus growth fast. How to Solve This Puzzle ?

3. ANSWERS Return on capital Reallocation of resources Saving Transfer from external financial firm to entrepreneurial firms Surplus Domestic Saving invests in foreign assets

4. HISTORY BACKGROUND Video: History background Video: History background 1 1. Cameron D’AngeloChina’s, Economic Growth,

5. REALLOCATION DPE: Domestic Private Enterprises SOE: State-owned Enterprises FE: Foreign Enterprises

6. DIFFERNECE BETWEEN DPE & SOE ProductivityAccess to Financial Markets DPEHighHard SOELowEasy China Scores poorly in terms of creditor rights, investor protection, accounting standards, nonperforming loans, and corruption Reason Chinese firms must rely heavily on retained earnings to finance investments and operational costs. Consequence

7. DIFFERNECE BETWEEN DPE & SOE SOE finance more than 30 percent of their investments through bank loans compared to less than 10 percent for DPE

8. INCOME INEQUALITY Fact: The Gini coefficient in China grew from 0.36 in 1992 to 0.474 in 2012 (0.61 in Southwestern University of Finance and Economics’ report ) Reason: This development may be due in part to the slow growth of wages relative to entrepreneurial income.

9. A. Preference, Technology, and Market 1 1. Two Periods Model: the first period and live off savings in the second period. 2. Utility Function: 3. Workers: N t+1 = (1 + ν ) N t.

10. A. Preference, Technology, and Market 2 4. Firm types: Entrepreneurial firms (E) & Financially Integrated (F) the manager makes decisions based on superior information ( χ > 1 extra efficiency) the manager can divert a positive share of the firm’s output for his own use. ( ψ < 1) F firms are weak at corporate governance and cannot effectively monitor their managers F firms will always choose a centralized organization, while E firms opt for delegation

11. A. Preference, Technology, and Market 3 5. Technology: 6. Budget: 7. Saving: Conclusion: wages equal the marginal product of labor

12. A. Preference, Technology, and Market 4 E Value: Interpreted: Value = Max {Total Output –money stolen – wages} Conclusion:

13. A. Preference, Technology, and Market 5 Capital = saving + Loan: Firms need enough money to pay back loan Conclusion: Optimal Saving Rate:

14. B. Discussion of Assumptions SOE Weak Corporate Government Less Productive Easy Borrow Money DPE Manager related High productive Hard Borrow Money Result :Hard for money to flow to high productive DPE firms

15. C. Equilibrium During Transition 1 Prove: Due to the disadvantage in raising funds, E firms choose in equilibrium a lower capital-output ratio than do F firms. 1. Capital per labor: 2. Define lending rate R l pins down the marginal product of capital of F firms 3. κ F is constant. in standard neoclassical open-economy: 4. Conclusion

16. C. Equilibrium During Transition 2 The growth rate of ρ E is hump-shaped in ψ. Recall: ρ E is return on capital from E firm; ψ is the stolen rate Assumption: 1.Ke and A are state variable. 2. capital per labor is constant. 3. entrepreneur savings is linear in Ke Conclusion:

17. D. Foreign Surplus, Savings, and Investment 1. Bank Balance: Interpreted : Loan to Firms F + Loan to Firm E + Foreign Bond = Saving 2. Foreign Surplus: Condition: The intuition for the growing foreign surplus is that as employment is reallocated towards the more productive E firms. 3. All E Firms : 4. Conclusion : Due to the financial frictions, the growth rate of the foreign surplus can exceed that of GDP, resulting in a growing B t / Y t ratio

18. E. Discussion of Results First in spite of the high investment and growth of industrial production, the rate of return of firms does not fall. Second A lower capital intensity in E firms than in F firms. Moreover, the rate of return to capital is higher in E firms than in F firms Third the reallocation from SOE to DPE in the data Forth such reallocation leads to an external imbalance— as in the data, the economy runs a sustained foreign surplus. Fifth predicts a growing inequality between workers’ wages and entrepreneurial earnings

19. QUANTITATIVE ANALYSIS 1. In Theory, we used two period model. Now, we extend our theory to an Auerbach-Kotlikoff OLG model in which agents live T periods. 2. Young entrepreneurs （富二代） work as managers for T/2 periods and as entrepreneurs for the remaining T/2 periods 3. The parameters set exogenously. One period is one year. Agents enter the economy at age 28 and live until 78 (T = 50). The average retirement age in China is 58, so workers retire after J = 30 years of work.

20. RESULT

21. MY OPINION Developing market (Magic Happens 1 )Magic Happens Increasing in investment caused increasing in demand at beginning. The market in China is empty in 1978. When there was investment, there would be demand for the products. Recent complete market caused foreigner surplus increase. After market is complete, government and E companies realized less of future grow opportunity. They looked for foreigner investment opportunities. Better political status. At very beginning, if a company wanted to do business in China, there would millions of front cost caused by political agreements. While less political agreements would be for the recent 10 years. Begin from 2008, F firms grew fast with a high rate of return than E firms. CHINA Developed market (Under Expectation) USA 1. Yuan Da Corporation, Time Lapse Video Of China Completing 15 Story Hotel In 6 Days,

22. Thanks for listening!