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Risks in China's Financial System

Author

Listed:
  • Zheng (Michael) Song

    (Department of Economics, Chinese University of Hong Kong, Shatin, New Territories, Hong Kong)

  • Wei Xiong

    (Department of Economics and Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08540, USA)

Abstract

Motivated by growing concerns about the risks and instability of China's financial system, this article reviews several commonly perceived financial risks and discusses their roots in China's politico-economic institutions. We emphasize the need to evaluate these risks within China's unique economic and financial systems, in which the state and nonstate sectors coexist and the financial system serves as a key tool of the government to fund its economic policies. Overall, we argue that ( a) a financial crisis is unlikely to happen in the near future and ( b) the ultimate risk lies with China's economic growth, as a vicious circle of distortions in the financial system lowers the efficiency of capital allocation and economic growth and will eventually exacerbate financial risks in the long run.

Suggested Citation

  • Zheng (Michael) Song & Wei Xiong, 2018. "Risks in China's Financial System," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 261-286, November.
    • Handle: RePEc:anr:refeco:v:10:y:2018:p:261-286
    DOI: 10.1146/annurev-financial-110716-032402
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    More about this item

    Keywords

    Chinese economy; debt risk; housing risk; policy risk; productivity;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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