Risks in China's Financial System

Posted: 8 Nov 2018

See all articles by Zheng (Michael) Song

Zheng (Michael) Song

City University of Hong Kong (CityUHK)

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2018

Abstract

Motivated by growing concerns about the risks and instability of China's financial system, this article reviews several commonly perceived financial risks and discusses their roots in China's politico-economic institutions. We emphasize the need to evaluate these risks within China's unique economic and financial systems, in which the state and nonstate sectors coexist and the financial system serves as a key tool of the government to fund its economic policies. Overall, we argue that ( a) a financial crisis is unlikely to happen in the near future and ( b) the ultimate risk lies with China's economic growth, as a vicious circle of distortions in the financial system lowers the efficiency of capital allocation and economic growth and will eventually exacerbate financial risks in the long run.

Suggested Citation

Song, Zheng (Michael) and Xiong, Wei, Risks in China's Financial System (November 2018). Annual Review of Financial Economics, Vol. 10, pp. 261-286, 2018. Available at SSRN: https://ssrn.com/abstract=3280830 or http://dx.doi.org/10.1146/annurev-financial-110716-032402

Zheng (Michael) Song

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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