Working Paper: NBER ID: w24230
Authors: Michael Song Zheng; Wei Xiong
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 non-state sectors coexist and the financial system serves as a key tool of the government to fund its economic policies. Overall, we argue that: (1) financial crisis is unlikely to happen in the near future, and (2) 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.
Keywords: No keywords provided
JEL Codes: E00; E02; G00; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial system distortions (P34) | capital allocation efficiency (D61) |
| state control and SOE favoritism (L32) | economic growth efficiency (O49) |
| rising leverage (G32) | financial instability (F65) |
| high savings rates and low external debt levels (F34) | financial stability (G28) |