Financial repression in China's agricultural economy

Abstract

Purpose The purpose of this paper is to examine whether or not financial repression exists in the saving and investment activities of farm households in rural areas of China. Design/methodology/approach This paper empirically investigates repression in rural China using the McKinnon‐Shaw model and microeconomic data combined with lending and savings rates and ceilings by rural credit cooperatives. Findings The paper finds only limited evidence of a repression dominated by savings, while investment response appears to be, at least on average, normal or unrepressed. More specifically, the paper finds that the relationship between growth and investment is consistent with an unrepressed economy but savings do show evidence of repression. Originality/value The political focus of economic reformation in China has been one of rapid economic growth in urban areas and a neglect of the agriculture sector. This focus on urban growth has led some Chinese scholars to speculate that the residual impact is a repressed agricultural and rural economy, at least in the context of McKinnon and Shaw framework. However, such speculations have not previously been verified. This paper presents the first attempt to determine the relationships exclusively in the context of the agricultural economy.

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