China

Judged by the established link in the literature between growth and institutions, which make up the domestic financial architecture (DFA), China’s post-reform rapid growth and low volatility in the absence of healthy institutions or efficient financial markets may present researchers with a serious puzzle. One may tackle this by arguing that Chinese official statistics could have exaggerated China’s growth performance while at the same time smoothing out its aggregate volatility. But an equally plausible argument is that an imminent outburst of crisis is veiled by the government’s attempts to play down the true extent of the state banks’ non-performing loans and the misconduct of agents in the stock market, other financial sectors and the regulatory authorities. What we are trying to argue here is that even if the official statistics are accurate, they may not reveal a true picture that is necessary to uncover all these hidden issues. The China puzzle has to be solved with a deeper understanding of the channels through which growth, aggregate volatility, and institutions are linked, which requires more than the proper measure of aggregate volatility using the available official data. This is the task of the current research.