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Anonymous Banking and Financial Repression: How Does China's Reform Limit Government Predation without Reducing Its Revenue?

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  • Bai, Chong-En
  • Li, David Daokui
  • Qian, Yingyi
  • Wang, Yijiang

Abstract

China's economic performance of the past two decades presents a puzzle for the economics of transition and development: Enormous private business incentives were unleashed that have fueled rapid economic growth despite the fact that China has had very weak "conventional institutions" (such as the rule of law and separation of powers)to constrain the government from arbitrary intrusion into economic activities. We argue that one mechanism that has limited the government's ability for predation and harassment is commitment through information decentralization, where the key institution is "anonymous banking," that is, a combination of the use of cash for transactions and the use of anonymous savings deposits. Meanwhile, the government has benefitted from the improved private incentives by collecting quasi-fiscal revenues from the state banking system through "financial repression," a combination of controls on international capital flows with restrictions on domestic interest rates. We show that the major features of China's economy concerning its fiscal decline, financial deepening, and the sectoral dual-track can be better understood using this analytical framework.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2221.

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Date of creation: Aug 1999
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Handle: RePEc:cpr:ceprdp:2221

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Keywords: Anonymous Banking; Financial Repression; Government Commitment; Government In Transition; Information Decentralization; Sectoral Dual-Track; State Predation;

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References

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  1. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  2. Brennan,Geoffrey & Buchanan,James M., 1980. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521233293.
  3. Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
  4. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
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Cited by:
  1. Huang, Yasheng, 2005. "Ownership biases and FDI in China: two provinces," Working papers 4537-04, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Yao, Yang & Yueh, Linda, 2009. "Law, Finance, and Economic Growth in China: An Introduction," World Development, Elsevier, vol. 37(4), pages 753-762, April.
  3. Yingyi Qian, 2002. "How Reform Worked in China," William Davidson Institute Working Papers Series 473, William Davidson Institute at the University of Michigan.
  4. Roland, Gerard & Verdier, Thierry, 2003. "Law enforcement and transition," European Economic Review, Elsevier, vol. 47(4), pages 669-685, August.
  5. Eckaus, R. S., 2003. "Some consequences of fiscal reliance on extrabudgetary revenues in China," China Economic Review, Elsevier, vol. 14(1), pages 72-88.
  6. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
  7. Ahrens, Joachim & Jünemann, Patrick, 2010. "Transitional institutions, institutional complementarities and economic performance in China: A 'Varieties of Capitalism' approach," Discourses in Social Market Economy 2010-11, OrdnungsPolitisches Portal (OPO).

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