Financial repression and liberalisation in China
2017-06-12T15:08:15Z (GMT) by
This thesis is concerned with the implications of the financial liberalisation of the Chinese economy for savings, investment, monetary policy and the exchange rate, in China. In the first part, the financial repression hypothesis is tested on savings and investment, with the result that there is some evidence to support the complementarity between money and physical capital in China since 1987, although this effect is shown to have become weaker over the sample period as liberalisation has taken place. The second issue is to investigate the consequences of interest rate liberalisation in China, using a dynamic stochastic general equilibrium (DSGE) model. There are two main findings. First, raising deposit rates serves to alter the division of production between consumption and investment and to improve the efficiency of the monetary policy transmission mechanism through interest rates. Second, the deregulation of deposit and loan rates leads to less volatility in inflation as interest rates are allowed to partly absorb shocks to the economy. Other monetary policies under financial repression in China are examined as well. The results based on the DSGE model suggest that the interest rate rule is more effective and powerful than the conventional money growth rule and the adjustment of the required reserve ratio helps little to contain inflation. In addition, the administrative window guidance on bank loans contributes to less volatility of inflation and stabilises the deregulation process of deposit and loan rates. The final part of the thesis examines the sources of the volatility in real exchange rate, which are shown to stem essentially from demand shocks, although up to a quarter of the volatility comes from relative supply disturbances, perhaps reflecting the importance of supply-side reform in China since the early 1990s.