Catching the political leader’s signal: Economic policy uncertainty and firm investment in China


Asei Ito, Jaehwan Lim, and Hongyong Zhang

China Economic Review (2023)

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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 and January 2017, possibly reflecting the turmoil in the Chinese stock market. Using firm-level panel data from 2012 to 2019, we find that a higher value of XiEPU is associated with a lower investment rate at the quarterly level. 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.

About the authors: Asei Ito was a HYI Visiting Scholar from 2022-23. Jaehwan Lim was a HYI Visiting Scholar from 2018-19.