Financial Repression and China’s Economic Imbalances

Abstract

Increasing domestic and external imbalances pose a serious challenge to economic development in China. While several forms of economic imbalances have been identified and discussed, many of these imbalances represent symptoms rather than the main issues that Chinese policymakers have to deal with in order to sustain economic growth over the next decade. Building on recent research on the relationship between financial repression and economic imbalances, the main premise of this paper is that financial repression in China has been at least partly responsible for extremely high levels of investments, a very strong industrial sector and a weakly developed service sector, serious external imbalances and rising inequality. This paper discusses how the Chinese government has used repressive financial policies since the beginning of the reforms, how these policies have resulted in economic imbalances, and some initial suggestions on financial reforms that would help in the pursuit of rebalancing the Chinese economy.

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