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China’s Financial System and Economic Imbalances

Author

Listed:
  • Xi Li

    (Department of Accounting , The Hong Kong University of Science and Technology)

  • Yikai Wang

    (Department of Economics , University of Oslo, Norway)

  • Tong Zhang

    (Department of Economics, University of Zurich, Switzerland)

Abstract

In this paper, we study how the financial market frictions in the Chinese economy, especially the interest rate policies, lead to inefficient resource allocations and economic imbalances. First, the repressed low interest rate for household savings induce them to increase saving in order to prepare for future necessary expenditures. Consequently consumption share is low and the economic imbalance of consumption and saving emerges. Second, the government provides explicit or implicit guarantees for state firms, so banks prefer to lend to state firms which are less productive. Private firms get less financial resource and operate at sub-optimal levels. The lower aggregate productivity implies the lower household income and consumption and worsen the imbalance. Due to the financial market frictions, traditional consumption stimulating policies, e.g., reducing the interest rate, may actually results in the opposite: even lower consumption and a more imbalanced economy. Reforms towards market-determined interest rates can help to rebalance the economy.

Suggested Citation

  • Xi Li & Yikai Wang & Tong Zhang, 2018. "China’s Financial System and Economic Imbalances," HKUST IEMS Working Paper Series 2018-53, HKUST Institute for Emerging Market Studies, revised Feb 2018.
  • Handle: RePEc:hku:wpaper:201853
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    File URL: http://iems.ust.hk/assets/publications/working-papers-2018/iemswp2018-53.pdf
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    References listed on IDEAS

    as
    1. Malhar S Nabar, 2011. "Targets, Interest Rates, and Household Saving in Urban China," IMF Working Papers 11/223, International Monetary Fund.
    2. Banerjee, Abhijit & Meng, Xin & Porzio, Tommaso & Qian, Nancy, 2014. "Aggregate Fertility and Household Savings: A General Equilibrium Analysis using Micro Data," CEPR Discussion Papers 9935, C.E.P.R. Discussion Papers.
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