China's Financial Repression: Symptoms, Consequences and Causes

Abstract

China's fi nancial system conforms to the stereotype described by the theory of financial repression. The banking sector is dominated by state ownership, interest rates are controlled by the government and credit allocation is heavily influenced by political factors rather than by commercial motives. The severity of repression in China's financial sector increased to an unprecedented level after 2008, when the Chinese government poured enormous financial resources into the economy as a response to the financial crisis. Financial repression has seriously damaged the sustainability of China's economy by decreasing economic effi ciency. However, financial repression may be maintained in the future despite its harmful effects because for the Chinese Communist Party control over fi nancial resources is a powerful weapon that can be used when necessary to address certain economic, political or social problems that may endanger its rule. Given the importance of fi nancial resources to the rule of the Party, it is diffi cult to imagine that it will eventually adopt a liberalization strategy and relinquish its control over the financial system.