Rethinking Financial Repression and Implicit Guarantee in China

80 Pages Posted: 30 Mar 2020

See all articles by Ping An

Ping An

Tsinghua University, PBC School of Finance, Students

Date Written: February 20, 2020

Abstract

I construct a model that can explain nearly all financial repression phenomena and main financial market equilibria in China. The model gets two insights: Foremost, the “financial repression” in China roots in the repressed household and state-owned enterprise (SOE) sectors rather than the finance sector. Against this background, the implicit guarantee is not the main risk of financial stability: On one hand, the implicit guarantee is an exogenous institutional factor, it already been contained in asset prices; on the other hand, the household and SOE’s repressions alleviate the implicit guarantee risk. If breaking the implicit guarantee, it will cause financial turmoil and households will bear the cost. To stabilize the financial system, the central bank needs to prevent redemption between banks and to recapitalize banks; while the effect of lender-of-last-resort is limited. If keeping the implicit guarantee, through improving liquidity in the inter-bank market and relaxing the SOE repression can raise financial market efficiency remarkably. Therefore, reform coordination between different sectors is more important for today’s China.

Keywords: financial repression, implicit guarantee, financial risk

JEL Classification: E44; E58; G18; O11; O16

Suggested Citation

An, Ping, Rethinking Financial Repression and Implicit Guarantee in China (February 20, 2020). Available at SSRN: https://ssrn.com/abstract=3541721 or http://dx.doi.org/10.2139/ssrn.3541721

Ping An (Contact Author)

Tsinghua University, PBC School of Finance, Students ( email )

No. 43, Chengdu Road
Beijing 100083
China

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