Featured faculty: Desmond Tsang
Written by Putro Harnowo

China’s high-speed rail reached a new milestone last year by surpassing 50,000km, making it the world’s longest network of bullet trains. In less than two decades, the lines now connect 97 per cent of Chinese cities with populations exceeding 500,000. This connectivity isn’t just about convenience but also about helping businesses navigate uncertainty with greater confidence.

A new high-speed rail line changes how investors view firms they previously perceived as out of reach. More connectivity also means more oversight, particularly over companies that deliberately sugarcoat their financial reports, which occasionally haunts the market.

Historically, many international giants have fallen for concealing poor performance. Wells Fargo was heavily fined for secretly opening millions of fake accounts to meet sales goals, and Wirecard filed for bankruptcy after its accounting fraud came to light.

“When negative information withheld by management eventually becomes public, they normally see their company stock price suddenly fall or crash,” says Desmond Tsang, an Associate Professor of Real Estate at the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School.

To ensure due diligence, institutional investors, such as mutual funds, pension funds, and insurance companies, regularly conduct corporate site visits to the firms they invest in, where financial analysts and fund managers meet rank-and-file employees to obtain information that supplements the firm’s financial statements.

“Unlike virtual meetings, corporate site visits allow financial analysts and fund managers to directly observe operations, management practices, and local conditions that can improve information accuracy and quality,” Professor Tsang adds. “This ‘soft information’ often reveals early warning signals of a stock crash and is difficult to capture remotely.”

Firms with less oversight are more likely to conceal their poor performance. Unfortunately, site visits depend heavily on location, so institutional investors typically only come when the benefits outweigh the inconvenience of travelling, leaving remote firms with less scrutiny.

Professor Tsang’s study finds that firms headquartered far from financial hubs, where institutional investors are concentrated, are significantly more prone to stock crashes. His study of Chinese firms also shows that the rapidly expanding high-speed rail network improves corporate site visits, hence lowering crash risks.

“The benefits of site visits are especially pronounced for distant firms, underscoring the role of transportation infrastructure in narrowing information gaps and improving transparency.”

Professor Desmond Tsang

Leaving no stone unturned, only if it’s convenient

Substantial stock ownership gives institutional investors immense influence over corporate governance and the strategic direction of the firms they invest in. The study titled Needed but not there: Firm location, corporate site visits, transportation, and stock price crash risk shows that company managers tend to be more honest with investors about their financial performance during site visits.

Along with Chu Xiaoling at the University of Macau and Lo Kin at the University of British Columbia, Professor Tsang examines the location of more than 1,500 Chinese companies listed on the Shenzhen Stock Exchange and tracks their share prices from 2012 to 2019. The team also collects information on high-speed rail station openings across China and matches it with corporate site visit data during the same period.

The analyses find that although firms with higher risk require more monitoring, the greater geographical distance imposes higher travel costs and considerable hurdles, making institutional investors less likely to visit remote firms in person. Ultimately, fewer corporate site visits are associated with a greater risk of a stock price crash.

“Site visits are not just busywork and particularly crucial for distant firms,” Professor Tsang says. “They cannot be substituted by informal exchanges of soft information between company managers and investors.”

Surprisingly, site visits do not necessarily reduce the risk of stock crashes for firms headquartered near financial centres. Due to their proximity, these firms are already under heightened scrutiny from their stakeholders.

How high-speed rail bridges the information gap

The Shenzhen Stock Exchange requires listed firms to publish a detailed record of each corporate site visit within two trading days, and the study finds significant market reactions around these days. This timely disclosure improves information quality, making stock price movements more closely reflect the company’s actual performance.

However, conducting these essential visits, especially to firms located remotely from the financial centre, often entails high travel costs and logistical challenges. Fortunately, the rapid expansion of China’s high-speed rail eases the burden.

The openings of the high-speed rail stations are found to increase the number of corporate site visits. Stock crash risk for firms connected with new stations decreases significantly following the launch of the high-speed rail network.

As financial analysts and fund managers become more likely to visit, the stocks of firms well-connected to the high-speed railway network are priced more accurately than those of firms that are not connected.

Takeaways for businesses and policymakers

While the study’s empirical setting is in China, Professor Tsang notes that its fundamental mechanisms, including information gap and stock price crash risk, are universal. “The findings should be relevant to emerging and developed markets, where companies don’t always share all the information with investors and transportation systems are visibly improving.”

“The benefits of site visits are especially pronounced for distant firms, underscoring the role of transportation infrastructure in narrowing information gaps and improving transparency,” he adds. “Therefore, policymakers may see value in promoting investor access to remote firms as part of market stability measures.”

For institutional investors, the study proves that physical site visits remain a critical and indispensable channel for exercising robust monitoring. As the inconveniences of site visits can affect stock crash risk, investors should account for travel time when evaluating investment opportunities and weigh other forms of due diligence carefully for firms that are difficult to visit.

For businesses that are inherently remote, such as those in the mining and agriculture sectors, Professor Tsang suggests that proactively offering site visits and transparent reporting can reduce the risk of stock crashes. Enhanced disclosure and hybrid engagement, such as physical visits accompanied by digital tools to check remote facilities, may also help bridge the gap.

The post How transportation mitigates stock crash risks for remote firms first appeared on China Business Knowledge.

Featured faculty: Choi Sungwoo
Written by Pan Jingyi

Derek Mobley had applied to more than 100 jobs over several years and had admittedly received rejection notices within minutes or hours. Confused and furious, the US citizen sued Workday, a human resources software firm that handled most of his applications, alleging that its artificial intelligence (AI) screened out his applications based on his age, race, and disabilities.

While Workday has argued that it’s not liable for hiring decisions, a court conditionally certified the age discrimination claims last year. This highly anticipated lawsuit will set a new precedent for AI-driven hiring practices and serves as a reminder that handing over employment decisions to algorithms can lead to backlash.

AI has inevitably reshaped human resource management, as also seen across industries today. A 2025 survey from Resume Builder shows that a majority of US managers have relied on AI for high-stakes decisions, such as promotions, raises and even layoffs. Akin to a dystopian Black Mirror episode, bosses are turning to machines to decide who’s in and who’s out.

Although more and more companies embed automation into their human resource operations, little is known about the impact on employee morale when their career is in the hands of a non-human actor. This is the puzzle that Choi Sungwoo, Assistant Professor of the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School, seeks to answer.

Professor Choi uncovers a latent repercussion of advanced technology in human resource management: organisational dehumanisation. “Organisational dehumanisation is the feeling of being reduced to a mere functional component of an organisation, much like a single bolt in a large machine, where your unique qualities, emotions and individuality are largely disregarded.”

Why AI can feel dehumanising

In a study titled AI in human resource management: A driver of organisational dehumanisation and negative employee reactions, Professor Choi works with Shin Hyejo of the Hong Kong Polytechnic University and Kim Hyunsu of the University of Macau on three scenario-based online experiments. They recruited nearly 700 participants through Prolific, an online platform widely used in academic research.

“When AI performs human resources operations, employee characteristics are seen as numbers. Therefore, employees would feel like they are not treated as humans.”

Professor Choi Sungwoo

Across all three experiments, participants were asked to imagine that decisions about their promotion or performance review were being made either by an AI system or by a human manager. The results were consistent: people reacted more negatively when the decision-maker was AI.

Those reactions were not trivial. Participants reported lower commitment, stronger turnover intentions, and even greater retaliatory feelings when seeing AI deciding their livelihood. In practice, they are more likely to search for another job and warn others to avoid working for the company.

A couple of factors drive such dehumanising feelings, Professor Choi notes. AI lacks the ability to understand social norms, personal issues and ethical concerns as a human manager can. AI also works in incomprehensible ways to laypeople, and employees may fail to understand how AI reaches its conclusions. As a result, they feel powerless and excluded from the decision-making process.

“Putting it all together, loss of empathy, transparency, and control can leave people feeling objectified,” Professor Choi says. “When AI performs human resources operations, employee characteristics are seen as numbers. Therefore, employees would feel like they are not treated as humans.”

Can human resources automation thrive?

Different companies have different sentiments towards AI. Professor Choi and his collaborators identify what they describe as a cultural paradox: companies with more collaborative and family-like cultures may experience greater resistance to AI in human resources management.

In these collaborative environments, employees believe that the management values cooperation, support and interpersonal relationships. If AI is then used to make major decisions, the technology can clash with such a principle.

“When a collegial workplace adopts AI for major human resource decisions, it can feel like a betrayal,” Professor Choi explains. “Employees experience a dissonance between the human-centred values the culture espouses and the perceived quantification of their worth that AI involvement implies.”

By contrast, the negative effects of AI appear to be less intense in companies with a more outcome-oriented system, where performance and results are already prioritised over interpersonal connections. But that does not mean AI is entirely harmless in such settings.

Even in outcome-focused organisations, AI-driven decisions on the workforce can still backfire and brew dehumanisation. Companies that deploy an AI system to select the most suitable candidates for promotion still see employees feel their aspirations or contributions are overlooked.

In short, whether focusing on outcomes or collaborations, the company needs to take the human aspect into account when adopting AI in human resources operations.

Keep “human” in human resources

Reputation is a valuable asset for a company. When job marketplaces like Glassdoor, Indeed, Seek, and even Google nowadays provide user-generated company reviews, the efficiency gains from AI might be quickly diminished by a wave of criticism from current and former employees.

For companies and business leaders, the message is not to abandon AI, but to use it wisely. One priority, Professor Choi says, is transparent communication. “Companies should clearly explain why AI adoption in human resources is necessary and reassure employees that it does not compromise the organisation’s core commitment to supportive and human-oriented growth.”

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Rather than allowing AI to make decisions on its own, Professor Choi suggests designing systems that enable humans and technology to coexist. “This hybrid approach helps preserve the sense that consequential decisions about people are ultimately made by people. If AI serves only in an assistive capacity with limited input into the final decision, the dehumanisation effect should be substantially mitigated.”

“Human resource practices are highly sensitive, and AI could be most valuable in managing less critical yet voluminous tasks, such as initial application screening, freeing human managers to focus on more complex and high-stakes decisions,” Professor Choi adds. “Despite that, companies should always be mindful of the risks of dehumanising feelings and act accordingly.”

The post Would you trust AI to decide your pay raise? first appeared on China Business Knowledge.

Featured faculty: Cao Xinyu
Written by Sally Ho

Across industries, companies are integrating artificial intelligence (AI) tools to support decision-making and day-to-day operations. It wouldn’t be wrong to assume that once employees understand the benefits, they will automatically embrace AI, but this is often not the case.

Even though AI technology delivers positive results, firms are still struggling to persuade employees to embrace it. A 2026 global survey from the digital adoption platform WalkMe finds that more than half of white‑collar employees abandon their AI tools and revert to manual work.

According to Cao Xinyu, Vice-Chancellor Associate Professor of Marketing at the Chinese University of Hong Kong (CUHK) Business School, algorithm aversion, or a human tendency to distrust computer algorithms, even when they perform better, has been well documented.

Sceptics view machines as inferior to humans, leading them to use AI only for mundane and laborious tasks. Employees may also worry about accountability for algorithmic errors or feel their professional abilities are undervalued.

Such concerns are reasonable, but complete resistance can prevent employees from realising the true benefits of the technology. It can also undermine AI investments, especially when the management has spent a fortune on tools that are used intermittently.

Companies often rely on training, which sometimes includes workshops on the practical application of AI, and encourage employees to use AI tools to improve productivity, but such methods aren’t sufficient. At this point, you may joke that forcing employees to use AI could work, but Professor Cao accidentally confirms it.

“We did not anticipate that temporary mandatory use would lead to sustained AI adoption. Our initial goal was simply to obtain a fair performance evaluation of the AI tool, but we then observed an interesting behavioural change among our research participants, so we explored its underlying mechanism.”

How temporary AI use leads to lasting adoption

In a study titled How forced intervention facilitates AI adoption, Professor Cao and her co-authors, Hu Chenshan of the University of Colorado Boulder, Sun Jiankun of Imperial College London, and Dennis Zhang of Washington University in St. Louis, collaborate with a large online education company in China.

The education platform introduced an AI tool to help sales staff suggest trial class teachers for prospective students. Despite its simplicity and convenience, this tool was underutilised. On average, sales staff use the AI tool only for 20 per cent of the prospective students. Furthermore, they tend to use the AI tool for low-quality leads who are less likely to convert.

“By transparently showing improvements, firms can help correct workers’ biased beliefs about AI and reduce resistance to adoption.”

Professor Cao Xinyu

To investigate the root cause, Professor Cao and the team evaluated the AI tool’s performance by dividing 171 sales employees into three groups. For three weeks, one group was asked to use the tool, another was prevented from using it, and the third group was free to use AI or not.

The AI tool is found to perform comparably to humans in terms of conversion rates, while significantly reducing manual effort and increasing efficiency. Those subject to a short-term mandate are more likely to continue using the AI tool, even after the experiment ends. Some may argue that repeated use makes employees become familiar and eventually form a new habit, but the data suggest more than that.

“If it’s a habit, everyone who was forced to use the AI tool for a while would keep using it in a similar way afterwards, but that’s not what we found. Employees who experienced a larger increase in conversion rate during the mandate-AI-use period tend to use AI more and use AI more on high-quality leads after the experiment,” Professor Cao adds. “Habit alone wouldn’t explain such varied behaviour linked to individual results.”

First-hand experience changes perception

Direct experience allows employees to reassess and change their biased beliefs about AI accordingly. People gain knowledge and skills through real-world practice, which can be more influential than traditional methods such as reading or listening.

The study also offers a clear lesson for company managers. Sometimes, obstacles may not stem from AI tools’ capabilities, but rather from how employees perceive the new tools. When scepticism is high, voluntary uptake alone may not be enough. A fleeting period of structured use allows users to evaluate the system on their own terms.

The caveat, Professor Cao warns, is that mandatory use must be implemented carefully. If employees feel pressured without a clear context, resistance may increase instead of decline. The main goal is not compliance but enabling an informed experience. She also suggests that firms should complement exposure with tangible results. “By transparently showing improvements, firms can help correct workers’ biased beliefs about AI and reduce resistance to adoption.”

Future challenges in AI adoption

As AI becomes increasingly embedded across industries, Professor Cao believes the findings are relevant to other sectors. “Biased beliefs about AI are quite common across industries, especially during the initial deployment in organisations. Employees who hold biased beliefs towards AI tend to underutilise it, and revising such biases plays an important role in addressing algorithm aversion.”

Beyond AI adoption, businesses anticipate the next phase of industrialisation, Industry 5.0, in which technology shifts from digital automation to a human-centric model. Companies will continue to face questions about how employees interact with algorithms, and for Professor Cao, this means more questions to answer.

“For example, how to best allocate tasks between human workforce and AI, how to design the incentives for employees in using AI, how AI transparency influences humans’ trust, learning, and long-term adoption,” she says. “These directions can help deepen our understanding of both the behavioural and market-level implications of AI adoption.”

For now, the study suggests that organisations may need to focus not only on technical deployment, but also on how employees learn to work with technology. In some cases, a brief period of direct experience may be enough to change how workers think about a technology and whether they choose to use it for good.

The post Can force adoption solve AI resistance? first appeared on China Business Knowledge.

Featured faculty: Wu Jing and Michael Zhang
Written by Putro Harnowo

Natural disasters have become more frequent and severe each year. In 2025 alone, devastating wildfires struck California, powerful hurricanes ravaged the Atlantic, and floods and cyclones over South and Southeast Asia inflicted profound economic losses. Across the US, the record-breaking natural disasters last year caused US$115 billion in total damage.

Businesses now operate in an increasingly unpredictable environment. Artificial intelligence (AI) is poised to help navigate turbulence, but its value is more evident in optimising business under stable circumstances. This is not surprising since corporate AI investment, such as from big pharma to tech giants, has historically prioritised building competitive advantage over resilience.

“AI undoubtedly helps productivity in normal times. However, given the current high-velocity environment characterised by disruptive upheavals, a better understanding of how to deal with such unrest becomes more urgent,” says Wu Jing, Professor in the Department of Decisions, Operations, and Technology at the Chinese University of Hong Kong (CUHK) Business School.

Disruptions brought by natural disasters impair business operations and erode investor confidence, leading to lower stock prices for affected companies. Professor Wu’s study reveals that companies that hire more AI talent see a smaller drop in stock value and recover more quickly after disasters as opposed to companies with less AI investment.

The interesting part is that companies with limited budgets are found to benefit more from AI investment during crises. However, their productivity gains still couldn’t match their wealthier peers in normal times due to a lack of organisational systems and infrastructure to fully reap AI potentials.

“Resilience becomes more and more important in today’s ever-changing environment. If crisis is the new norm, infusing AI into firm productions is no longer a luxury,” he adds.

How much AI investment is enough?

Along with Michael Zhang, the Wei Lun Professor of Business AI at the same department, as well as Han Miaozhe at the Hong Kong University of Science and Technology and Shen Hongchuan at the University of Macau, Professor Wu’s latest study, Artificial intelligence and firm resilience: Empirical evidence from natural disaster shocks, assess AI’s impact on firm resilience during challenging periods.

The study focuses on 3,137 firms in the US across agriculture, mining, utilities, construction, manufacturing, trade, transportation, and warehousing sectors. To measure AI investments, the researchers identify AI-related job postings and find that the number of job advertisements seeking AI-related skills was low relative to the overall job postings, but has increased from 8.12 per cent in 2010 to 16.41 per cent in 2019.

“Resilience becomes more and more important in today’s ever-changing environment. If crisis is the new norm, infusing AI into firm productions is no longer a luxury.”

Professor Wu Jing

The team also looks into the International Disaster Database and spots 141 disasters that directly affected sample companies, mainly storms and floods. The researchers then merge the dataset with the stock prices data from the Centre for Research in Security Prices and S&P Compustat.

Stock returns represent adjustments in the general expectation of a firm’s performance, reflecting the firm’s ability to mitigate the damage amid catastrophes. Firms that hire more AI-related positions see moderate losses and higher stock returns during and after the disaster. They can fully recover quickly if at least 2.4 per cent of their job postings require AI-related skills, such as deep learning, image processing, AI tool operation, and the like.

This positive impact is greatest at the peak of the disaster, with the most effective AI-empowered roles focused on cognitive tasks, decision-making, and supply chain coordination. “AI generates significant resilience for firms facing natural disaster shocks primarily by optimising supply chains and production inputs,” says Professor Wu.

Natural disasters create tangible challenges that AI can get around, such as rerouting shipments or optimising output from remaining machinery. In the stock market, this benefit relies on shareholders believing the firm can continue operations amid natural disasters.

However, Professor Wu notes that such resilience may not persist in the face of human-induced shocks, such as cyberattacks, labour strikes, or industrial accidents. The damage in human-caused disasters is often reputational or contractual, and AI-driven operations cannot fully offset it. In this case, AI can only serve as a risk detector, providing data to support human operators rather than mitigating the damage.

“AI serves as complementary support for tangible operations and works more efficiently if it targets physical assets, such as factories,” he adds. “When AI is used on financial assets, intellectual property, or market access, its effects are limited.”

How to invest in AI wisely

Many may conflate AI with information technology (IT), as both often go hand in hand, so the researchers seek to examine them more deeply. IT is meant to improve efficiency by coordinating, communicating, and monitoring a wide range of activities, whereas AI focuses on applications where data and algorithms generate predictions to assist decision-making.

The team then measures investments in non-AI technologies by weighing job postings with general IT skills, such as robotics, data analytics, or cloud-related skills. The analysis finds that while IT is great for enhancing day-to-day operations and cutting costs, AI plays a distinct role in helping firms to be more resilient during crises.

Professor Wu suggests that AI investment should not be spread evenly across all technical functions. Instead, focus on encouraging managers who can maximise output with AI when resources are scarce. By concentrating AI capabilities in high-level cognitive and operational roles, firms can improve their resilience.

“Therefore, roles like supply chain coordinators should be prioritised to be empowered with AI skills for better predicting materials arrivals and planning alternative routes to address the disruptions directly,” says Professor Wu. “Strategic decision-makers and production operations managers should also be equipped with AI tools to make quicker, better decisions in resource allocation.”

For financially constrained firms, rather than investing solely in AI tools, the most critical takeaway is to prioritise organisational design, such as training manpower and setting up procedures to ensure AI can make a real difference. “These firms should view AI investment as an insurance premium for resilience instead of an immediate profit engine, ensuring they have the IT backbone to support it,” he adds.

“They should also focus on deploying AI in areas that immediately reduce operational costs or mitigate certain risks, such as vendor monitoring or financial planning. This will allow them to generate the savings needed to fund further resilience tools while avoiding the trap of investing in technology they cannot utilise efficiently.”

The post Can AI help businesses weather any storm? first appeared on China Business Knowledge.

Featured faculty: Li Jingyu
Written by Joanne Madrid

The pandemic was a poignant reminder of the importance of information technology, or IT. Almost overnight, businesses scrambled to go digital, with video calls replacing boardroom meetings and cloud platforms keeping teams connected.

The rush to adopt technology has not slowed since. According to McKinsey & Company’s 2025 report, 88 per cent of firms across 105 countries are now using artificial intelligence in at least one area of their business, a spike from 20 per cent in 2017.

For China, technology is the core of its economic powerhouse. Private companies contribute 70 per cent of the country’s technological innovation, and Chinese tech firms, whether in semiconductors, artificial intelligence, or robotics, have been rushing to go global.

Companies now have a wealth of options to choose tech tools, but does piling on more technology automatically make a company better prepared for the next crisis? Not necessarily, according to a study co-written by Li Jingyu, an Assistant Professor of the Department of Management at the Chinese University of Hong Kong (CUHK) Business School.

“Having too much variety of IT tools can actually make it more costly and difficult for companies to come up with new plans, decide on the best ones, and then put them into action,” says Professor Li. “This problem gets much, much worse during unexpected shocks, where companies have to make decisions and act quickly.”

The paper, titled Navigating the storm: Towards a theory of IT portfolio diversity, leadership power, and organisational resilience to major shocks, found that companies with a moderate range of digital tools were generally more resilient during crises than those with either very few or many digital tools.

The safe zone of digital tools

Along with Li Mengxiang of Hong Kong Baptist University, Hsieh Po-An at Georgia State University, Wang Xincheng at Tongji University, and Gu Bin at Boston University, Professor Li examined 2,926 listed Chinese firms, tracking their revenues before, during and after the pandemic. Firms that are better at absorbing a shock would see smaller drops in income, or even manage to grow.

At the heart of the study is the concept of IT portfolio diversity, which refers to the variety of digital tools a company can deploy. This includes everything from cloud computing and video-conferencing systems to mobile applications and enterprise management software.

The analyses find that companies with a moderate level of IT portfolio diversity have genuine advantages. They have sufficient technologies to allow them to shift operations online, coordinate staff remotely, and keep information flowing when normal routines are upended.

“Having too much variety of IT tools can actually make it more costly and difficult for companies to come up with new plans, decide on the best ones, and then put them into action.”

Professor Li Jingyu

Yet the benefits did not keep rising in a straight line. Firms that had accumulated a very wide array of technologies often struggled during the crisis. A sprawling and fragmented technology setup can be expensive to maintain and difficult to coordinate.

These problems become acute when speed and clarity are most needed, such as during a crisis. In normal times, firms felt less pressure to reorganise their systems. After the crisis, many had already adapted to new ways of working. “When IT portfolio diversity is too low or too high, it can lead to inferior performance related to organisational resilience,” Professor Li adds.

Think of it as a chef’s kitchen. A good range of knives, pans and appliances makes cooking faster and more versatile. But cram every kitchenware imaginable onto the worktop and the cook room becomes cluttered and confusing, especially when hundreds of unexpected guests arrive.

Giving technology leaders a seat at the table

Having the right tools is only half the equation, because the man behind the gun pulls the trigger. Who is in charge of those tools and how much authority they hold matters significantly.

Companies where senior technology executives sat on the board or held top-level positions were far better at turning a diverse set of digital tools into a real edge. These leaders could coordinate resources across departments, resolve conflicts between teams, and ensure that technology decisions supported the company’s broader strategy under intense pressure.

“Firms that intend to build digitally enabled organisational resilience to withstand unforeseeable shocks should pay special attention to enhancing the power of their IT leaders,” Professor Li says.

Without a high level of authority, even well-stocked technology tools can go to waste. If the head of technology lacks the standing to redirect resources or overrule competing departmental priorities during a crisis, the firm’s digital tools may sit underused or, worse, pull in different directions.

It is worth mentioning that what constitutes too much varies from company to company. Companies with very strong IT leaders might be able to manage a much wider array of digital tools effectively before getting overwhelmed.

Industry context changes the calculus

Not all industries experienced the crises in the same way. Transport and hospitality were devastated during the pandemic, but pharmaceuticals and express delivery boomed. These contrasting fortunes shaped how much the technology-leadership combination mattered.

In hard-hit sectors, the payoff from owning diverse digital tools with strong tech leaders was amplified. Affected firms benefit more from well-coordinated digital responses, but if their digital systems are disjoint, more severe consequences ensue. In this case, technology becomes a high-stakes game.

For businesses that thrive during crises, their digital portfolios and powerful tech leaders aren’t critical to survival since they already meet what the market needs.

In short, digital expansion alone does not make a company crisis-proof. Organisations need to think carefully about how many different technologies they can realistically manage, and ensure that the people responsible for those technologies have decision-making authority.

“Our findings underscore the need for firms to deliberately cultivate organisational resilience, enabling them to strategically align IT portfolio diversity and the authority of tech leaders in responding to different environments,” says Professor Li.

While the study covers only Chinese listed companies, she believes the core insight is likely to resonate well beyond borders. In a crisis, the winners are not necessarily the companies with the most technology, but those with the right amount and the leadership to make it count.

The post Why too much tech hurts resilience first appeared on China Business Knowledge.

Featured faculty: Philip Zhang Renyu and Lin Yunduan
Written by Putro Harnowo

Not everything needs to carry meaning, especially on social media. Take 67, a nonsensical expression Gen Alpha uses to confuse adults, for example. While digital platforms can forecast trends by analysing users’ behaviour, humans are inherently unpredictable and easily swayed by others. Algorithms may struggle to keep pace.

Digital anthropologist Brian Solis said, “Social media is about sociology and psychology, not technology.” This can explain many inconsequential trends exploding online. Within their social network, people randomly influence and are influenced by others, even when they don’t actually know each other.

“You may have heard of the six degrees of separation, where everyone in the world is connected through a chain of no more than six acquaintances. It means that everyone is actually more connected than they realise through social networks,” says Lin Yunduan, Assistant Professor of the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

Social networks lie at the intersection of many disciplines, from sociology and marketing to even politics. Understanding how ideas spread within communities or whether a new product thrives in the market amid unpredictable human behaviour becomes critical.

Given that people respond to one another in messy, often unpredictable ways, it can be hard to pin down why an idea catches on, or why a product takes off in one community but not another. To cut through that complexity, Professor Lin introduces the fixed-point approximation, a method that distils the back-and-forth of social influence into a clear picture of how these behaviours ultimately settle across the network.

“Imagine it as if a group of people want to schedule a gathering. It starts as an unspecified plan, as anyone may still change their minds. When someone confirms they can make it, their friends may become more likely to join, but when someone who confirmed later cancelled due to a sudden change, this can also ripple through the group,” she says.

“The fixed point refers to a certain level where, after these influences play out, each person’s likelihood of adopting an idea becomes steady and doesn’t change anymore.”

Predicting the trends with a mathematical formula

In a paper titled Nonprogressive diffusion on social networks: Approximation and applications, Professor Lin and Associate Professor Philip Zhang Renyu from the same department collaborate with Zhang Heng of Arizona State University and Max Shen of the University of Hong Kong to develop a deterministic approach to decode interactions within the unpredictable social network.

The fixed-point approximation starts from a few interpretable ingredients, including network structure to know who is connected to whom, intrinsic value or how much each person likes or dislikes the new idea before influences from others, noise distribution or the unpredictable whims that sway a person’s mind, and network effect intensity or how sensitive a person is to being influenced by their connections.

“Basically, we try to find a middle ground to estimate how people will behave under the influence of a network structure.”

Professor Lin Yunduan

This framework offers a way to capture social influence at scale without tracking every possible chain reaction in the network. Instead, it estimates each person’s likelihood of adoption under peer influence. For example, in a small neighbourhood, A has a 90 per cent chance of buying and B has a 30 per cent chance.

The approach is most reliable for people embedded in large, well-connected communities, since no single contact can easily dominate the outcome, and the influence of many peers creates a more stable signal. By contrast, for individuals with very few connections, the prediction can be harder, since one friend’s decision can meaningfully tilt the result, and random factors play a larger role.

To address those outliers, the paper proposes a small add-on step. After producing the main estimate, it focuses on low-connection individuals and generates many plausible scenarios for what their close contacts might do, then averages the results to refine that person’s adoption likelihood.  Professor Lin provides the formula of the framework in a GitHub repository here.

“Basically, we try to find a middle ground to estimate how people will behave under the influence of a network structure,” she says. “The approach does not require simulating every possible ripple through the network, yet it still captures the influence patterns accurately, turning messy, shifting interactions into a clear picture of each person’s likelihood of adopting a new trend.”

The researchers have examined their framework using five actual Facebook networks available in an open-access digital archive. The results show that the framework can accurately measure the likelihood of a new idea adoption, with an average error of less than 3.5 per cent. The graph below illustrates the framework’s efficiency in a small network compared with real-world results.

The researchers also compare it with other models that examine interactions within a network and find that their framework is 70 to 230 times faster than the basic simulations and 23 to 30 times faster than the advanced simulations.

Wider adoption in businesses and communities

A strong suit of fixed-point approximation is its ability to quickly pinpoint the key actors to maximise the adoption of a trend or idea, while accounting for unpredictable factors within a social network. This framework can be used in any practical setting where one’s behaviour impacts others.

“For instance, in a product launch, someone will purchase the new product, and these first purchasers may influence others to follow,” Professor Lin says. “Our framework can help to identify which first purchasers have a high downstream impact more quickly. These purchasers don’t necessarily have large numbers of followers, but are those positioned to spread adoption efficiently through their networks.”

While the framework can operate offline, digital platforms have advantages due to their infrastructure, connectivity and ability to utilise data in real time. Therefore, the framework would enable platforms to respond more quickly to market changes and stay ahead of competitors, while also adjusting their strategies over time to sustain momentum.

Another strong point of fixed-point approximation is its ability to help firms set pricing strategies by accounting for network influence. For retailers, this means the framework can help measure how many customers are likely to purchase a new product at different prices and set realistic sales goals.

Beyond profits, government or community leaders trying to spread an important message or encourage a new behaviour can use this framework to identify key community members whose participation will most effectively encourage others. The framework can also help understand how to seed these messages within the community to achieve widespread adoption.

The post How to forecast trends amid uncertainty first appeared on China Business Knowledge.

Featured faculty: Zhao Meiling
Written by Pan Jingyi

Reputation is the cornerstone for auditors to attract and retain clients. Investors rely on audited financial statements to assess a company’s financial health, and an audit is intended to provide assurance that the reported numbers are fairly stated. But what happens when an auditor suffers a reputation blow?

Despite hefty penalties and increasingly stringent regulatory standards, audit failures continue to occur. Even the prestigious Big Four are not immune to misconduct. EY in Germany, PwC and Deloitte in China, and KPMG in the UK have all been severely sanctioned for their high-profile audit failures in the past few years.

When a reputational crisis occurs, the public may begin to question the quality of all audits produced by the audit firm, and it may seem logical that clients would quickly switch to a different auditor to restore stakeholders’ trust. However, that is not always the case.

“The costs of switching are often evidently greater than the benefits. New auditors need time to understand the businesses, and there are always risks during the transition.”

Professor Zhao Meiling

A study by Zhao Meiling, an Assistant Professor at the School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School, finds that around 90 percent of corporate clients remain with the embroiled audit office. The reason is largely practical.

“The costs of switching are often evidently greater than the benefits. New auditors need time to understand the businesses, and there are always risks during the transition,” she explains.

Professor Zhao’s study titled Auditor Office Reputation Damage and Their Audit Clients’ Voluntary Disclosures explores a straightforward question: If companies retain a “compromised” auditor, what actions do they take to rebuild stakeholders’ trust?

Voluntary disclosures to rebuild investors’ trust

Working with Cheng Mei and Paul Michas of the University of Arizona, Professor Zhao analysed data from more than 31,000 US-listed companies to see how companies respond when their auditors are caught in the spotlight. The key pattern is clear: clients that stay with the embroiled audit office increase the number of management forecasts by 5 to 10 percent.

Management forecasts are voluntary, forward-looking disclosures that companies issue throughout the year. Some forecasts focus on expected earnings while others provide more granular information on sales, expenses, or specific product lines.

Since the auditor’s reputation damage may undermine investors’ trust, company management compensates by offering more direct and timely information. “Financial disclosure is an important means for managers to communicate private information to outsiders, thereby reducing the information asymmetry and providing greater clarity on firm  performance,” says Professor Zhao.

Meanwhile, companies that switch auditors do not exhibit a similar increase in voluntary forecasting. Such a difference suggests companies weigh the costs and benefits of two credibility-repair strategies: either incur the cost of switching auditors or retain the auditor and increase disclosure to offset the loss of credibility.

When do companies talk even more?

The study also identifies when the increase in voluntary forecasting is strongest. Companies become particularly more open when demand for information is high. Typically, investors and financial analysts are hungry for clarity shortly after scandals come to light.

Companies with heavier coverage by external financial analysts not only issue more disclosures but also tend to provide more detailed forecasts, including revenue and cost figures, rather than aggregate earnings forecasts. Managers adjust the type and quality of disclosures to align with the information most valued and trusted by the market.

However, not all companies respond by disclosing more. In highly competitive industries, such as technology and retail, greater disclosure may reveal proprietary information that rivals could exploit, causing more harm than good for firms.

Therefore, even though companies may be expected to increase voluntary disclosures when their auditor is mired in scandal to rebuild trust, if the risks and downsides of sharing that extra information are too high, they are less likely to issue management forecasts.

If the scandal is less severe, managers may feel that their existing audit reports already convey enough information, despite the problems with the auditors. “Issuing management forecasts is costly and can consume significant resources,” Professor Zhao says. “Overall, companies weigh the risks and consequences of sharing information when deciding how much to disclose.”

Real financial benefits for companies

For the final question of whether “talking more” actually works, the team examines the shareholder’s expected returns and realized stock returns. The evidence suggests that voluntary disclosure is not just busywork but instead delivers real benefits for companies.

A scandal-ridden auditor office could create a negative image for clients, leading to higher perceived risks and weaker stock performance, especially for companies that stay silent. Companies that increase management forecasts after a reputational shock can mitigate, and in some cases fully offset, those negative effects.

In other words, voluntary disclosure is not merely a public relations tool in this setting. The study suggests that it can reduce firms’ cost of equity and improve realized returns. As Professor Zhao says, “More voluntary disclosures during reputational shock save companies real money and help protect their stock price.”

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For investors, a rise in management forecasts can be a meaningful signal that the company is trying to reduce uncertainty and enhance transparency. For regulators, the results highlight that self-correction measures taken by the companies can help authorities build a clearer picture of where oversight is most needed and when more rules might add value.

Regulators could encourage greater transparency through voluntary disclosure, especially when audit quality concerns arise, and analyse circumstances in which such disclosures might do more harm. In such cases, there might be a greater need for targeted disclosure requirements to protect investors.

For company executives, given that changing auditors can be disruptive and expensive, increasing voluntary disclosures can be a lower-cost alternative to rebuilding credibility. “By stepping forward and communicating more, companies can use their own voice to rebuild trust,” Professor Zhao adds.

The post Why do clients stay with embroiled audit firms? first appeared on China Business Knowledge.

Featured faculty: Liao Huiyao
Written by Sally Ho

For decades, a common preconception about working mothers has been that having children may reduce women’s commitment to work. This perception has led to a phenomenon dubbed the “motherhood penalty,” which refers to the documented disadvantages women face after becoming mothers and discrimination in hiring because of their childbearing responsibilities.

Parenthood affects both mother and father. However, broader economic research has shown that child rearing has significantly contributed to the gender wage gap, with women experiencing a larger disadvantage.

“Managers often perceive women as having more work-life conflict, and thus, less committed to work when becoming mothers, even when data suggests otherwise, leading to less inclination to reward them with promotions and salary increases,” says Liao Huiyao, Assistant Professor in the Department of Management at the Chinese University of Hong Kong (CUHK) Business School.

However, Professor Liao and his co-authors challenged this assumption, observing that working parents, especially mothers, sometimes show greater work commitment. They suggest this stems from a sense of obligation to perform at their best, using their professional dedication as a positive symbolic influence on their families.

“Confucian philosophy places a strong emphasis on parental responsibility for a child’s character development and education, beyond just providing for material needs,” he adds. “This profound sense of parental obligation naturally extends into the workplace, shaping how working parents interpret the very meaning of their work.”

Professor Liao calls this concept “family-centred symbolic meaning of work,” in which employees view their jobs as a means to set a positive example for their children. His study, Uncovering a motherhood advantage: How parenthood impacts perceptions of the meaning of work and work outcomes, challenges prevalent stereotypes about working parents.

The interesting part is that mothers are more likely to view their work as a means to instil moral values in their kids, which, in turn, motivates them to go the extra mile at work. This finding breaks the stigma associated with working mothers that perpetuates the motherhood penalty.

Mothers view work beyond salary

To illustrate a working mother who embodies a family-centred symbolic meaning of work, Professor Liao points to former US First Lady Michelle Obama. She was a lawyer at a top-tier law firm, where she met and mentored the future US president, and then held senior leadership roles at the University of Chicago before moving to the White House.

“Michelle Obama sees her career as a way to teach her daughters about responsibility,” he says. “This view is a common, yet under-researched motivation.”

Along with Tammy Allen at the University of South Florida, Liu Zhaopeng Liu at Shandong University, Thomas Ptashnik at Providence College, and Wu I-Heng at the University of South Alabama, Professor Liao gathered responses from 867 Chinese and US employees and their supervisors through a series of studies on how employees view their work in relation to their families.

“It is precisely because of their commitment to shaping their children’s character that working parents, especially mothers, are motivated to work harder and engage in more ethical and organisational citizenship behaviours.”

Professor Liao Huiyao

The analyses find that having children reshapes parents’ identity and priorities. Work no longer feels like merely an individual pursuit but part of how someone cares for and nurtures their family through acting as a role model. Becoming a parent is linked to a stronger moral commitment to family.

These positive effects are particularly pronounced among mothers. Researchers call this a “motherhood advantage,” in which a heightened sense of symbolic meaning drives increased work effort and organisational citizenship behaviours.

“Work effort has long been considered a cornerstone of a strong work ethic, while organisational citizenship behaviours, such as being helpful, loyal, and going above and beyond, are seen as pro-social actions,” says Professor Liao. “Individuals with high family-centred symbolic meaning of work are more likely to engage in both to demonstrate the character they wish to instil in their children.”

Parenthood reshapes work purpose

While the study does not find that parenthood automatically improves job performance, it names psychological mechanisms that can explain how parenthood affects the family-centred symbolic meaning of work.

Professor Liao highlights that while parenthood reshapes work purposes for both genders, the effect is particularly pronounced for women for two reasons. First, the physical experience of pregnancy is a transformative life stage that often fosters a more interdependent self-concept in women, making them more likely to integrate their family extensively into their sense of identity, including their work identity.

Additionally, despite evolving social norms, women are still associated with caregiving responsibilities in many societies, reshaping their identity more profoundly. As a result, mothers may imbue their work with deeper personal significance to fulfil their maternal responsibilities.

“For fathers, it remains more socially acceptable to compartmentalise work and family, and view careers as personal pursuits rather than as a medium for teaching moral values for their children,” he says.

However, the key is not simply having children, but how parenthood reinterprets professionalism. This psychological process is not confined to a single society but reflects a broader pattern across cultures.

Moving beyond the motherhood penalty

The motherhood advantage does not deny the existence of structural barriers that women face in the workplace, but rather highlights a personal motivation that emerges with parenthood. Far from diminishing professional drive, motherhood may intensify the sense that work matters more than just for money.

“It is precisely because of their commitment to shaping their children’s character that working parents, especially mothers, are motivated to work harder and engage in more ethical and organisational citizenship behaviours,” says Professor Liao.

Supporting parents rather than sidelining them may therefore allow organisations to reap from stronger sense of purpose. “These insights hopefully lead managers to re-evaluate their assumptions during hiring and promotion decisions, and to stop penalising working mothers based on unfounded biases,” he adds.

“Companies should move away from the outdated idea that the best employees are those who work long hours without family responsibilities. Instead, they should recognise and value that working parents, particularly mothers, can be highly committed and productive because their family inspires them to be role models.”

The post How motherhood boosts work effort and initiatives first appeared on China Business Knowledge.

Featured faculty: Michael Zhang
Written by Sally Ho

Social media has levelled the playing field of access to financial knowledge, granting institutional and retail investors alike equal access to timely news and sentiment that shape their decisions. Take the collapse of Silicon Valley Bank in 2023, for example. A panic spiralled on social media turned a bank with US$212 billion in assets into bankruptcy in just two days.

Meanwhile, environmental, social and governance (ESG) performance has become one of the most talked-about corporate lingos, not just among consumers but also as a signal in modern investing. Companies are held accountable for their sustainability claims and practices, and failure to do so may put them in the spotlight or, even worse, lawsuits.

Retail investors nowadays increasingly express their views online, influencing other investors’ behaviour and market movements. On social media, a company’s stance on climate change, labour practices, or corporate governance can spark heated discussions. However, little is known about how much retail investors actually value ESG practices among corporates.

“Sustainable investing has accelerated in the past few years, but most discourses focus on how ESG affects firm value or analyst recommendations,” says Michael Zhang, Wei Lun Professor of Business AI at the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School.

“There is a significant gap between the rising importance of ESG in the corporate world and the lack of understanding regarding how retail investors actually process ESG-related information.”

Professor Zhang’s latest study, Attention or sentiment: How social media react to ESG?, aims to address this gap and finds that, when it comes to sustainability, retail investors’ talk and walk don’t always go hand in hand. While retail investors do care about ESG, they may not be able to determine if such practices are financially material in the short term.

Classic dilemma of profit vs. planet

To explore how retail investors react on social media about companies’ ESG performance, Professor Zhang, along with Kalok Chan at City University of Hong Kong, Xu Dapeng of South China University of Technology, and Hong Hong of Tongji University, examines tens of thousands of posts on Seeking Alpha, a popular online community platform for retail stock investors.

With more than 17 million monthly visitors, Seeking Alpha publishes content written by diverse contributors and features comment sections, forums, and groups where users discuss investment strategies. Given these characteristics, this platform has been dubbed social media for retail investors.

The researchers focus on firms in the S&P 500 index, or the top US-listed companies. After including only firms discussed on Seeking Alpha and having ESG scores, the final sample consists of 429 firms.

“Managers should realise that in the short term, ESG gets you noticed, but financial metrics likely still drive the sentiments.”

Professor Michael Zhang

Given that online attention and sentiment are often drivers of stock market volatility and trading volume, the team categorised the posts into two key responses: social media attention and social media sentiment. Attention refers to how many posts are about a certain company, and sentiment refers to the emotional tone, including optimistic or pessimistic attitudes, towards the company.

After matching and analysing the social media posts with ESG performance scores from Sustainalytics, a global provider of ESG ratings and data, the researchers found that firms with strong ESG scores attract more social media attention. ESG score upgrades are associated with increased social media attention, while downgrades result in decreases in the following months.

However, retail investors on the platform do not necessarily express more positive feelings toward firms with high ESG scores. Investors also do not show more positive sentiment after ESG upgrades or more negative sentiment after downgrades. This suggests a disconnect where sustainability sentiment does not always align with visibility.

Talk is cheap, but vibe speaks volumes

The study further examines the three major components of ESG separately and their individual impact on social media attention and sentiment. The environmental and social components represent the main drivers of increased attention online, while the governance aspect did not have any significant impact.

For online sentiment, social and governance aspects have no significant impact, but surprisingly, the environmental score alone is associated with less favourable sentiment. This finding might seem counterintuitive, but it aligns with a specific stream of financial theory: many retail investors treat environmental efforts as a cost, rather than a clear financial benefit.

“It is likely that retail investors in these online communities often view high environmental commitment as a financial burden,” Professor Zhang says. “From a utilitarian investment perspective, extensive spending on environmental initiatives, like emission cuts or resource reduction, can be seen as an expense that might hurt financial performance.”

Despite being beneficial to wider society, investing in sustainability initiatives can raise questions about short-term profitability and provoke scepticism due to a perceived threat to a company’s bottom line. It appears that retail investors on online forums tend to be driven primarily by financial concerns, rather than environmental causes.

Research implications and future directions

ESG activities may increase visibility among retail investors, but firms shouldn’t assume that higher visibility automatically translates into a positive image, since investor sentiment is driven by profit. “Companies need to manage their expectations regarding the return on their ESG investments when it comes to public perception,” Professor Zhang adds.

“Maintaining ESG standards is crucial for relevance and visibility, even if it doesn’t immediately result in a warmer reception from retail investors. Managers should realise that in the short term, ESG gets you noticed, but financial metrics likely still drive the sentiment.”

For market analysts and regulators, the disconnect between attention and sentiment raises questions about how ESG information is communicated and interpreted. Social media may amplify awareness, but it doesn’t guarantee confidence in sustainability practices or in their financial implications.

Looking ahead, Professor Zhang expects to examine whether the findings hold true for smaller-cap companies, not just S&P 500 firms. “We also plan to explore other digital channels such as X [formerly Twitter], Yahoo! Finance, or Google search to see if the attention and sentiment dynamics might differ on general social media platforms,” he adds.

For now, the key takeaway is clear. In the digital age, seeing isn’t always believing. ESG draws attention, but steering investor sentiment requires more than just doing good.

The post Do retail investors really care about sustainability? first appeared on China Business Knowledge.

Featured faculty: Wu Xian
Written by Putro Harnowo

Against all odds, China managed to rack up record-breaking exports last year with a US$1.2 trillion surplus. It was quite unprecedented, given the US mounting tariffs for months. The tension eventually calmed following the October truce, but a bigger problem is brewing closer to home. The world factory has experienced sustained deflation since 2023.

In contrast to inflation, deflation is a broad decline in the prices of goods and services. While it is not always harmful, deflation may spiral into weak consumer spending, lower business profits, and increased unemployment. The government has committed to stimulating domestic consumption by lowering benchmark interest rates to encourage spending.

“When deflation happens, the government normally wants to boost the economy by lowering the interest rate to raise the inflation rate mildly. However, at some point, the interest rate will hit the floor and cannot be lowered further,” says Wu Xian, Assistant Professor of Finance at the Chinese University of Hong Kong (CUHK) Business School.

To shift away from heavy reliance on traditional interest rate adjustments, the central bank can utilise unconventional monetary policy tools. For instance, the People’s Bank of China, between 2013 and 2014, injected liquidity into the banking system by allowing certain bonds to serve as collateral for commercial banks to borrow. This tool is called collateral-based monetary policy or collateral framework.

“Collateral framework is not unique to China. It has also been adopted widely across the world, for example, the Federal Reserve’s term asset-backed securities loan facility and the European Central Bank’s long-term refinancing operations. However, its impacts were hard to measure,” Professor Wu adds. “There’s a lot of endogeneity in economics, so we couldn’t tell whether the change in markets is due to this policy or other factors, like bond characteristics or the unobservable economic shocks.”

A study by Professor Wu titled Collateral-based monetary policy: evidence from China, in collaboration with Fang Hanming of the University of Pennsylvania and Wang Yongqin of Fudan University, is the first ever to measure the causal positive effects of the collateral framework on the real economy.

Professor Wu and her collaborators find that the collateral framework significantly decreases the bond spread, or the yield gap between a corporate bond and a safer government bond, and provides companies with more capital to invest and pursue other business activities. This tool also has broader and long-term effects. For instance, follow-up studies show that a collateral framework targeting green bonds can stimulate more investments in green initiatives.

Lessons learned from Chinese bonds

China’s central bank provides lending programmes for commercial banks based on loan terms, including the standing lending facility or short-term liquidity operation for immediate cash, the medium-term lending facility with three to 12-month terms, and the pledged supplementary lending with three to five-year term loans to support specific sectors.

To obtain these loans, banks need to put down securities as collateral. Since 2013, the central bank has accepted treasury and local government bonds, as well as AAA-rated corporate bonds, as collateral. This framework was extended in June 2018 to include AA and AA+ rated corporate bonds. While AAA bonds are more secure, an AA rating offers a slightly higher yield for a marginally higher risk profile.

Interestingly, many Chinese bonds are traded on two venues, despite having the same fundamentals. Bonds listed in the interbank market for qualified institutional investors are also available on major exchanges, such as the Shanghai and Shenzhen exchanges, for non-bank financial institutions and retail investors.

Only bonds in the interbank market are eligible as collateral, since the interbank market is regulated by the central bank. Professor Wu and the team use these bonds as the treatment group and the same bonds in the exchange market as the control group. “This allows us to establish a causal relationship between the collateral framework and bond prices, which is not possible in other financial markets.”

The team examines daily bond trading from January to September 2018 and finds that the collateral framework increased the value of eligible bonds. Before the collateral expansion, banks could use the AA and AA+ rated corporate bonds to borrow from other financial institutions in the repo market. The repo market participants don’t lend money based on the full value of the bonds but reduce them by a few per cent.

“Companies can borrow at a lower cost as long as they can issue at least AA or AA+ rated bonds. This allows the central bank to support and ease funding to the real economy.”

Professor Wu Xian

Being included in the collateral framework trims such reduction by three per cent, boosting the collateral value and the prices of these bonds. It reduced the spreads of the newly eligible bonds by 37–53 basis points, equivalently, 10–15 per cent of the average spread in the secondary interbank market, where previously issued bonds are traded among qualified institutional investors.

This effect can further pass through to newly issued bonds in the primary market and allows bond issuers to secure a lower borrowing cost. It reduces the spread of the eligible bonds in the primary market by about 35-56 basis points. This means the bond issuers can borrow at a cheaper rate than before.

“Companies can borrow at a lower cost as long as they can issue at least AA or AA+ rated bonds. This allows the central bank to support and ease funding to the real economy,” Professor Wu adds.

Wider effect in the market

After 1 June 2018, issuing new eligible bonds is cheaper in the interbank market than in the exchange market. Firms can take advantage of this policy and choose the best market to issue bonds. Eligible bonds are more likely to be issued in the interbank market than the exchange market.

By the end of 2018, the People’s Bank of China’s lending facilities totalled more than eight trillion Chinese yuan, about 25 per cent of the monetary base.

“Collateral framework is crucial when interest rates are low,” Professor Wu adds. “This way, the central bank can conduct policy expansion by allowing commercial banks to borrow more and lend to other institutions and businesses.”

The 2018 collateral framework also made the People’s Bank of China one of the first central banks to specifically target green bonds. While her study doesn’t explore the impact on green finance, Professor Wu sees that follow-up studies have shown that green firms received more loans because of this framework.

Furthermore, as the interbank and exchange markets coexist with a shared bond structure, Professor Wu plans to understand more deeply whether this arrangement is efficient. Her next study looks into which type of assets should be traded in the decentralised interbank market, which holds 86 to 90 per cent of all Chinese bonds.

“There’s some benefit to keeping both markets, as each has its own strengths,” she adds. “A centralised market is more transparent, but you can find dealers to trade in large quantities in the decentralised exchange markets. How to design these markets is an interesting direction to explore in the future.”

The post How China fine-tunes bond values to spark economy first appeared on China Business Knowledge.