Arthur Kroeber
Arthur Kroeber

China has promised wide-ranging financial reforms, moving from repression to the market. That is a much-needed change tells economist Arthur Kroeber in the Institutional Investor, to allow household to use their earnings in a more sensible way.

The Institutional Investor:

What set of motives would make the government – in this case the all-powerful seven members of the Standing Committee of the Politburo of the Communist Party of China, led by Li and President Xi Jinping – more decisive in marketizing credit?
They have three interrelated motives: rebalancing China´s macro economy away from financial repression, sustaining real economic growth and avoiding a meltdown of the shadow banking system.
“The financial repression model creates a tangle of side effects, which if not eventually pruned back can severely impede economic growth,” explains Arthur Kroeber, senior fellow at the Brookings-Tsinghua Center in Beijing and editor of the China Economic Quarterly. “Households earn a lot less income from their bank deposits than they would if interest rates were set by the market, so household incomes tend to grow slower than GDP. Second, because the return on their savings is minimal, households need to save a larger share of their annual income in order to meet their long-run savings goals for retirement and medical expenses. Finally and more subtle, cheap capital creates incentives for investing in capital-intensive manufacturing rather than labor-intensive services.” In short, financial repression must be rolled back to rebalance away from fixed investment´s towering 50 percent share of the economy.

More at the Institutional Investor.

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