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

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

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
Date of revision:
Handle: RePEc:wop:stanec:99014
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  1. repec:bla:restud:v:62:y:1995:i:4:p:541-55 is not listed on IDEAS
  2. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
  3. Jacques Crémer, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 275-295.
  4. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
  5. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
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