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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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  • Chong-En Bai
  • David D. Li
  • Yingyi Qian
  • Yijiang Wang

Abstract

May 31, 1999 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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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 99014.

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Date of creation: 31 May 1999
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Handle: RePEc:wop:stanec:99014

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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., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922, December.
  3. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May.
  4. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
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Cited by:
  1. Yao, Yang & Yueh, Linda, 2009. "Law, Finance, and Economic Growth in China: An Introduction," World Development, Elsevier, vol. 37(4), pages 753-762, April.
  2. Eckaus, R. S., 2003. "Some consequences of fiscal reliance on extrabudgetary revenues in China," China Economic Review, Elsevier, vol. 14(1), pages 72-88.
  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. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
  5. Huang, Yasheng, 2005. "Ownership biases and FDI in China: two provinces," Working papers 4537-04, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Ahrens, Joachim & J√ľnemann, 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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