Chapter 2: Domestic Financial Liberalization and Financial Depth in China
2. Domestic ﬁnancial liberalization and ﬁnancial depth in China INTRODUCTION As noted in the introductory chapter, the existing literature examining ﬁnancial reform in China displays several shortcomings. At the most basic level, the trend in DFL has yet to be clearly established. On one hand, the SOBs continue to allocate most of their loans to the state sector of the Chinese economy (Table 2.1). On the other hand, the SOBs have experienced a declining market share (Table 2.2) as a result of vast institutional diversiﬁcation (Table 2.3). The rapid ﬁnancial deepening that has taken place during the reform period is also indicative of substantial ﬁnancial reform (Table 2.4). Therefore, the initial aim of this chapter is to shed light on the complex issue of whether in fact meaningful DFL has taken place. DOMESTIC FINANCIAL LIBERALIZATION IN CHINA This section begins by tracing reforms in the three areas where the government has traditionally intervened in China’s ﬁnancial sector; interest rate controls, ﬁnancial intermediation controls and credit allocation controls. An account of the recent institutional reform of the PBC is also provided. An overall ﬁnancial repression index for the reform period is then constructed which captures changes in the above policy variables. Interest Rate Controls The pre-reform period has been described as the ‘dark ages for interest rates’ (Yi, 1994, p. 77). During this time interest rates were ﬁxed at negligible levels and rarely varied. In general, DFL should ultimately be revealed indirectly through rising real interest rates. Once interest rate...
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