Explaining the China Puzzle: High Growth and Low Volatility in the Absence of Healthy Financial Institutions

This study is motivated by the China puzzle: the very impressive post-reform growth with relatively low aggregate volatility in the absence of healthy financial institutions by international standards. We argue that political economy constraints on the reform process have made China‟s policymakers adhere to administrative measures that they are familiar with and confident in. This adherence has obstructed the building of efficiency-enhancing market institutions, which in turn reinforces the government‟s reliance on administrative interventions to achieve high growth while keeping volatility low. We use the ARCH-M model and a reconstructed Chinese expenditure accounts data over the past 60 years to identify the role of the government in China‟s macroeconomic performance. Our findings show that the economy indeed exhibits a stronger inertia and is less sensitive to shocks, especially in the case of fixed capital investment, implying that investors are less risk-averse, which is atypical given China‟s weak institutional environment. The government intervention with fixed capital investment and export is further analyzed by a regression exercise See above See above