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Title: Beating the trap of financial repression in China
Authors: Li, David D.
Keywords: Reform
Financial repression
State banks
Issue Date: Mar-2001
Series/Report no.: Working Papers ; 0101
Abstract: The key feature of China's financial sector in the reform era has been a financial repression implemented by maintaining the monopoly of state banks. I argue that this is an expedient reform strategy in order to maintain macroeconomic stability for reform. However, the cost of financial repression is increasing with the progress of reform. Moreover, once in place, financial repression is persistent and hard to remove, forming a trap of financial repression. I propose that the key to beat the trap of financial repression in China is to break up the largest state banks into small ones. The two preconditions for this to be successful are proper restructuring central government public finance and appropriate dealing with non-performing loans.
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