Financial Deepening and Financial Stability

The cultivation and regulation of the financial system has been a key component of the Chinese economy’s reform and opening-up process over the past 40 years. In this section, we will focus on some stylized facts and provide a brief history of the cultivation and regulation of the financial system over the past 40 years of reform and opening-up before summarizing some economic lessons we can learn from this process. Our main argument is that the steady progress of local-currency-based financial deepening is essential for fast investment in the real economy and channeling savings into investment. However, financial deepening is based on financial stability, which requires the government to proactively monitor and mitigate financial risk.