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Catching the Political Leader's Signals: Economic policy uncertainty and firm investment in China

Asei Ito, Jaehwan Lim and Hongyong Zhang ()

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This study uses a text dataset of the Chinese President’s speeches and reports from November 2012 to December 2021 to construct an original economic policy uncertainty (EPU) index: President Xi Jinping’s EPU (XiEPU). XiEPU moderately correlates with a previous study’s representative EPU, showing notably different peaks. Our index spiked in April 2016 after a sharp decline in the Chinese stock market index and late 2020, reflecting the global COVID-19 pandemic. Using firm-level panel data, we find that a higher value of XiEPU is associated with a lower investment rate at the quarterly level and has a larger and longer-lasting effect than the existing China EPUs. Moreover, there are noteworthy heterogeneous effects among firms and periods. Specifically, we find a stronger effect of XiEPU on manufacturing sectors, a weaker effect on state-owned enterprises, and a stronger effect in the second term of Xi Jinping’s presidential tenure after November 2017.

Pages: 37 pages
Date: 2022-08
New Economics Papers: this item is included in nep-big, nep-cna and nep-pol
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