This paper studies the evolution of China's production and trade patterns during its integration into the global economy. We document and explain new facts concerning changes in production and exports at the industry and firm levels using microdata and a quantitative Ricardian and Heckscher–Ohlin model with heterogeneous firms. Counterfactual simulations reveal that capital deepening made China's production and exports more capital-intensive, although labor-biased productivity growth acted as a counterforce. Consistent with the data, our model demonstrates that China's trade openness peaked around the mid-2000s and fell until the 2020s, while the world's exposure to Chinese exports rose continuously.

Recessions are associated with sharp increases in turbulence that reshuffle firms’productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high- to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous ffrms and ffnancial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity ffrms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

We document that monetary policy has asymmetric effects on investments by large and small firms in China. Large firms’ investment are highly responsive to monetary expansions, but less affected by monetary contractions. In contrast, small firms’ investments are less responsive to monetary expansions, but significantly affected by monetary contractions. We argue that this asymmetric responses of large and small firms stem from their differential access to credits in a two-tiered banking system. Large firms borrow from the big state-owned banks, which have a strong depositor base, whereas small firms borrow mainly from small banks which does not have a large depositor base and therefore rely heavily on the inter-bank market for financing their loans to small firms. We build a DSGE model with heterogeneous banks, heterogeneous firms, and an inter-bank market that is calibrated to the Chinese data. We show that the model’s quantitative predictions about the effects of monetary policy on large and small firms are consistent with the facts we documented.

We document that monetary policy has asymmetric effects on investments by large and small firms in China. Large firms’ investment are highly responsive to monetary expansions, but less affected by monetary contractions. In contrast, small firms’ investments are less responsive to monetary expansions, but significantly affected by monetary contractions. We argue that this asymmetric responses of large and small firms stem from their differential access to credits in a two-tiered banking system. Large firms borrow from the big state-owned banks, which have a strong depositor base, whereas small firms borrow mainly from small banks which does not have a large depositor base and therefore rely heavily on the inter-bank market for financing their loans to small firms. We build a DSGE model with heterogeneous banks, heterogeneous firms, and an inter-bank market that is calibrated to the Chinese data. We show that the model’s quantitative predictions about the effects of monetary policy on large and small firms are consistent with the facts we documented.