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Risks in China's Financial System

Zheng (Michael) Song () and Wei Xiong ()
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Zheng (Michael) Song: Department of Economics, Chinese University of Hong Kong, Shatin, New Territories, Hong Kong
Wei Xiong: Department of Economics and Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08540, USA

Annual Review of Financial Economics, 2018, vol. 10, issue 1, 261-286

Abstract: Motivated by growing concerns about the risks and instability of China's financial system, this article reviews several commonly perceived financial risks and discusses their roots in China's politico-economic institutions. We emphasize the need to evaluate these risks within China's unique economic and financial systems, in which the state and nonstate sectors coexist and the financial system serves as a key tool of the government to fund its economic policies. Overall, we argue that ( a) a financial crisis is unlikely to happen in the near future and ( b) the ultimate risk lies with China's economic growth, as a vicious circle of distortions in the financial system lowers the efficiency of capital allocation and economic growth and will eventually exacerbate financial risks in the long run.

Keywords: Chinese economy; debt risk; housing risk; policy risk; productivity (search for similar items in EconPapers)
JEL-codes: E02 G01 (search for similar items in EconPapers)
Date: 2018
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