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The Structural Nature of Internal and External Imbalances in China

  • Wing Thye Woo

China has a built-in inflationary tendency because of the partially-reformed nature of its economic system. Specifically, the post-1978 marketization of the economy has interacted with the continued state ownership to create an inflationary 'liquidity tango' between the state-owned enterprises (SOEs) and the state-owned banks. Whenever the hard budget constraint is imposed on the SOEs, China's dysfunctional financial system would impart a deflationary bias to the economy and render China a capital exporting country by constraining the growth of aggregate demand to be less than the growth of aggregate supply. The use of price mechanisms as the only instruments for all economic problems is not appropriate for China's transitional economy, e.g. trade surpluses are better handled by the establishment of an efficient financial intermediation mechanism than by appreciation of the Yuan.

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Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 4 (2006)
Issue (Month): 1 ()
Pages: 1-19

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Handle: RePEc:taf:jocebs:v:4:y:2006:i:1:p:1-19
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  1. Wing Thye Woo, 2003. "Recent Claims of China's Economic Exceptionalism: Reflections Inspired by WTO Accession," Working Papers 13, University of California, Davis, Department of Economics.
  2. Woo Wing Thye & Hai Wen & Jin Yibiao & Fan Gang, 1994. "How Successful Has Chinese Enterprise Reform Been? Pitfalls in Opposite Biases and Focus," Journal of Comparative Economics, Elsevier, vol. 18(3), pages 410-437, June.
  3. Liu, Liang-Yn & Woo, Wing Thye, 1994. "Saving Behaviour under Imperfect Financial Markets and the Current Account Consequences," Economic Journal, Royal Economic Society, vol. 104(424), pages 512-27, May.
  4. Donald Hanna & Yiping Huang, 2004. "The Impact of SARS on Asian Economies," Asian Economic Papers, MIT Press, vol. 3(1), pages 102-112.
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