Abstract

This article sheds new light on the puzzle why and how China's economy and private sector can grow so remarkably despite serious financial repression and credit control. We show that there exists a “leakage effect”: State-owned enterprises borrow from banks with the official interest rate, and then relend their loans to private firms with the (black) market interest rate. When doing so, all parties involved are better off, and the inefficiency of financial repression is mitigated.

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