Now, why hasn’t this happened in the past? Interest rate liberalization has been on the agenda in China for six or seven years. The 11th Five-year plan which ended at the end of 2010 had as one of its key planks the market-oriented interest rate liberalization. The 12th Five-year plan in which we are now in the second year has as one of its planks the market-oriented interest rate liberalization. Wen Jiabao who made some nice pro-reform statements in the last few weeks also at his speech at the NPC in 2009, three years ago, said, “We must implement market–oriented interest rate liberalization.” Absolutely nothing has happened. They haven’t done anything. The system is as financially repressed as ever.
My view is that financial repression is basically a zero sum gain. It is redistributing. It is taking money out of some people’s pockets and putting it at another people’s pockets. It is not very transparent. The losers tend to be large numbers of people who are losing a small amount. The winners tend to be smaller organizations that are winning large amounts. So financial repression here is defined broadly to mean underpriced capital, low interest rates on deposits, exchange rate that has been undervalued for most of the period, and had helped coastal provinces at the expense of inland provinces.
They’ve helped the export and import competing sectors of the economy at the expense of importers, consumers and services in particular; they’ve made commercial banks extremely profitable at the expense of savers. The system has been highly beneficial for property developers.
In particular, if you are familiar with this list of the hundred richest people in China that is produced every year by this Dutchman based in Shanghai, this Hurun Report; it is absolutely fascinating reading. You scan down the list of the top 100 people; it varies a little bit from year to year, but generally speaking, my very rough – I’ve never actually counted but my very rough impression is somewhere between 2/3 and 3/4 of all the 100 richest people in China had made their money in property. This is very different from the oligarchs in Russia who stole state assets at pennies on the dollar and became highly wealthy.
So property developers and construction companies have done extremely well. Local governments have also benefited because they have sold a lot of land at very high prices to the property developers and that has helped them.
Sustaining China’s Economic Growth Pt. 16