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2014 | OriginalPaper | Chapter

3. Financial Repression and Structural Financial Power

Author : Sandra Heep

Published in: China in Global Finance

Publisher: Springer International Publishing

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Abstract

This chapter analyzes the structural financial power potential of the developmental state. Section 3.1 provides an overview of the political economy of Japan’s postwar financial system and the pressures that resulted in its gradual liberalization. Section 3.2 looks into the political economy of China’s system of financial repression and enquires into its compatibility with the acquisition of structural financial power deriving from the international role of a country’s financial markets. Section 3.3 compares the ability of the Chinese and the Japanese authorities to maintain their control over the domestic financial system.

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previous chapter Financial Power and the Developmental State
next chapter Financial Repression and Currency Internationalization
Footnotes
1
On the other hand, internationalization in the sense of an increasing involvement of international actors may contribute to liberalization. For an analysis of the role of international actors in the liberalization of China’s financial system see Schlichting (2008).
 
2
The motives that drove US pressure will be analyzed in Chap. 4. For a detailed account of the negotiations leading to the Yen-Dollar Agreement see Frankel (1984).
 
3
As Frances Rosenbluth (1989: 57) has pointed out, the revision of Japan’s Foreign Exchange and Foreign Trade Control Law did not indicate a significant turning point since it “formally sanctioned rather than initiated the change in policy.”
 
4
The three policy banks are China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China.
 
5
With the establishment of China’s sovereign wealth fund, Huijin became a subsidiary of the China Investment Corporation.
 
6
The distinction between the ‘normal mode’ and the ‘crisis mode’ of political decision-making in China has been introduced by Sebastian Heilmann (2004: 42–43).
 
7
For analyses of the importance of alternative financing channels to non-state-owned firms see Allen et al. (2005, 2012), Ayyagai et al. (2008).
 
8
According to Naughton (2007: 451), M2, a money measure that represents currency plus demand and savings deposits, increased from 32 % of GDP in 1978 to 162 % in 2005, a rate that is much higher than in most other economies. In the same period, household saving deposits increased from 6 % of GDP to 77 %.
 
9
In addition to the state-owned commercial banks and policy banks, the Chinese banking system comprises joint-stock commercial banks that are owned by groups of government agencies, state-owned and non-state-owned enterprises as well as city commercial banks that are owned by city governments. Other banking institutions such as rural credit cooperatives and foreign banks only play a very limited role (Naughton 2007: 456–457).
 
10
Lardy (2008: 2) estimates that the implicit tax on household deposits amounted to CNY 255 billion, the equivalent of 4.1 % of GDP, in the first quarter of 2008.
 
11
For a detailed account of the development of China’s equity markets see Walter and Howie (2003) and Heilmann and Gottwald (2002).
 
12
For an overview of this reform see McGuinness (2009).
 
13
In recent years, a growing number of private companies have listed on Shenzhen’s small and medium enterprise board that opened in 2004 and its board for growth companies that was established in 2009. However, the market capitalization of these boards still only makes up a tiny fraction of the total market capitalisation of China’s equity markets.
 
14
For a detailed analysis of the role of FDI in China’s capital inflows see Prasad and Wei (2005).
 
15
In addition to outward foreign direct investment and portfolio investment in the framework of the QDII scheme, Chinese outbound capital flows include the investment of China’s foreign exchange reserves as well as cross-border lending by China’s policy banks. These capital flows will be discussed in Chap. 5.
 
16
According to one interviewee, a limit on the amount that individuals should be allowed to invest was planned from the very beginning but not clearly communicated (Interview No. 20).
 
17
Under current regulation, Chinese individuals are only allowed to buy up to USD 50,000 worth of foreign exchange each year.
 
18
The liberalization measures aimed at the renminbi’s internationalization will be analyzed in detail in Chap. 4.
 
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Metadata
Title
Financial Repression and Structural Financial Power
Author
Sandra Heep
Copyright Year
2014
Book
China in Global Finance

Print ISBN: 978-3-319-02465-3

Electronic ISBN: 978-3-319-02466-0

Copyright Year: 2014

DOI
https://doi.org/10.1007/978-3-319-02466-0_3