DP2221 Anonymous Banking and Financial Repression: How Does China's Reform Limit Government Predation without Reducing Its Revenue?

Author(s): Chong-En Bai, David Daokui Li, Yingyi Qian, Yijiang Wang
Publication Date: August 1999
Keyword(s): Anonymous Banking, Financial Repression, Government Commitment, Government In Transition, Information Decentralization, Sectoral Dual-Track, State Predation
JEL(s): G28, H2, O16, O17, P26
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2221

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.