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Changing Roles of Repressive Financial Policies

Aug 27-2019   



 

If government interventions in the financial system had been completely scrapped, China's GDP growth could have been 0.8% and 0.3% lower in the 1980s and 1990s respectively, whereas in the new millennium it might have seen an additional 0.1% increase, according to a paper by Prof. Huang Yiping and NSD PhD student Ge Tingting.

 

The paper has recently been published by the Cato Journal with the title Assessing China’s Financial Reform: Changing Roles of Repressive Financial Policies. Prof. Huang is also the Deputy Dean of NSD.

 

Repressive financial policies tend to suppress efficiency and heighten risks, yet they also have positive impacts such as expediting intermediary and building confidence. The dynamics between positive and negative impacts decide the actual effect of repressive financial policies.

 

Shunning the Shock Therapy, China opted for incremental and progressive reforms, which have been instrumental in maintaining economic, social and political stability and achieving 9% annual GDP growth for 40 years. Part of the package has been to sustain the SOEs to avoid sudden collapse of the economic system and mass unemployment. Repressive financial policies were part of the Dual-Track reform tactic in the early days and could be viewed as subsidies in disguise for the SOEs.

 

However, such policies have increasingly become a drag on growth. Government interventions are causing higher efficiency loss and lower capital efficiency as the economy shifts from input-dependent model to innovation-driven model.

 

Market-based reform should be undertaken to develop multi-layered capital markets and increase the ratio of direct financing, enable market systems to play the decisive role in allocating financial resources, and improve oversight with an eye on preempting systemic risks. 

Changing Roles of Repressive Financial Policies

Aug 27-2019   



 

If government interventions in the financial system had been completely scrapped, China's GDP growth could have been 0.8% and 0.3% lower in the 1980s and 1990s respectively, whereas in the new millennium it might have seen an additional 0.1% increase, according to a paper by Prof. Huang Yiping and NSD PhD student Ge Tingting.

 

The paper has recently been published by the Cato Journal with the title Assessing China’s Financial Reform: Changing Roles of Repressive Financial Policies. Prof. Huang is also the Deputy Dean of NSD.

 

Repressive financial policies tend to suppress efficiency and heighten risks, yet they also have positive impacts such as expediting intermediary and building confidence. The dynamics between positive and negative impacts decide the actual effect of repressive financial policies.

 

Shunning the Shock Therapy, China opted for incremental and progressive reforms, which have been instrumental in maintaining economic, social and political stability and achieving 9% annual GDP growth for 40 years. Part of the package has been to sustain the SOEs to avoid sudden collapse of the economic system and mass unemployment. Repressive financial policies were part of the Dual-Track reform tactic in the early days and could be viewed as subsidies in disguise for the SOEs.

 

However, such policies have increasingly become a drag on growth. Government interventions are causing higher efficiency loss and lower capital efficiency as the economy shifts from input-dependent model to innovation-driven model.

 

Market-based reform should be undertaken to develop multi-layered capital markets and increase the ratio of direct financing, enable market systems to play the decisive role in allocating financial resources, and improve oversight with an eye on preempting systemic risks.