Anonymous Banking and Financial Repression: How Does China's Reform Limit the Government Predation Without Reducing its Revenue?

Conference Paper No. F29, The 4th Annual International Conference on Transition Economics, Beijing, July 1999

Posted: 18 Oct 1999

See all articles by Chong-En Bai

Chong-En Bai

The University of Hong Kong - School of Economics and Finance; University of Michigan - William Davidson Institute

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Yingyi Qian

Tsinghua University - School of Economics & Management; Centre for Economic Policy Research (CEPR)

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: May 1999

Abstract

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.

JEL Classification: O16, P21

Suggested Citation

Bai, Chong-En and Li, David Daokui and Qian, Yingyi and Wang, Yijiang, Anonymous Banking and Financial Repression: How Does China's Reform Limit the Government Predation Without Reducing its Revenue? (May 1999). Conference Paper No. F29, The 4th Annual International Conference on Transition Economics, Beijing, July 1999, Available at SSRN: https://ssrn.com/abstract=187589

Chong-En Bai (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

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University of Michigan - William Davidson Institute ( email )

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David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

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HOME PAGE: http://home.ust.hk/~davidli

Yingyi Qian

Tsinghua University - School of Economics & Management

Beijing, 100084
China

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Industrial Relations Center
Minneapolis, MN 55455
United States
612-624-6814 (Phone)
612-624-8360 (Fax)

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