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From financial repression to financial liberalization

Abstract: With the development of economic and financial globalization, the emerging global financial markets, which urgently requires our financial system out of the traditional government intervention, relying on market mechanisms to improve the efficiency of the financial industry. From the financial repression of the hazards, blind to the dangers of financial liberalization, discusses China's financial reform measures at this stage --- the process of progressive liberalization.

Keywords: Financial Repression; financial liberalization; financial globalization;

First, financial repression and harm

1 , financial repression

financial repression McKinnon by U.S. economist and Xiaoti out. McKinnon pointed out that the reason why less developed countries, is that real interest rates too low, even negative. This may be due to the Government to implement the wrong policy, artificially low interest rates; also may be due to inflation, or both. For savers, given the lack of attractive low interest rates, do not want the remaining funds into the financial system. Financial markets have demand far exceeds supply, the Government was forced to Under credit rationing, capital is almost free to use, and sometimes even negative real interest rates, as long as the borrower to borrow money, Therefore, the enterprise regardless of whether the project at hand, the project prospects, investors are flocking to the borrower, the whole society of the investment thirst. Able to borrow money, not look at your cost, but whether you have nepotism. The result is caused by extensive use of funds, the investment efficiency is low, productivity is low, part of the national income used for consumption after deducting running out, the savings rate declined. On the other hand, low interest rates and hinder investment in new revenue to the transformation. Economic development, inadequate sources of new investment required, savings and investment, further widening the gap, the total demand and total supply is more acute conflicts, economic stagnation. Poor economic conditions, in turn, shrink the storage source of capital shortage, forcing the Administration to implement a more stringent control of interest rates, thus forming a vicious The artificially low interest rates, resulting in inefficient financial system and economic phenomenon, McKinnon called the

2, financial repression is the ability to expand our corporate finance bottleneck

the development of enterprises needs some funding. If the financial markets are inappropriate human intervention, various types of capital prices are distorted, the enterprise can not develop according to their own requirements to adjust its capital structure to achieve the best condition. Corporate finance capacities are compromised, which will hinder the healthy development of the economy. China's financial repression is the money supply and cost of capital, liquidity and so affect the ability of corporate finance.
First, the Government controls on interest rates to influence household savings, is the inhibition of the capital market for the price. If high inflation led to negative interest rates, negative interest rates will force the residents to increase savings. Household savings in financial repression of interest rates under the lack of flexibility. Since reform and opening, China's real deposit interest rate of 8 years is negative, the actual lending level of 7 years is negative. Savings over the same period has been about 30% of the rate of growth. This is because the Government in the inhibition of the credit market, also inhibited the capital market, due to less investment channels, the residents have to choose savings. This leads to over-reliance on bank loans business, which greatly increased the risk of bankruptcy of banks and enterprises.
Second, government restrictions on interest rates, the financial needs of those different types of price discrimination, resulting in market segmentation, the resulting out of a rental market, the existence of rent constitutes the leakage of funds. In addition, the credit markets has also led to inhibition of both the banking and political interests of profit maximization maximize the dual objective. Such as preferential loans to state-owned enterprises, the state-owned enterprises are now generally low, resulting in huge losses banks bad debt, bad debt losses this part of the credit market funds constitute leakage. Such a large flow of funds directly to non-productive activities, resulting in inefficient allocation of resources.
Finally, price controls on credit markets and limited government securities market segmentation and price distortions in the capital market development. A narrow understanding of capital markets, especially stock market, direct financing of enterprises engaged in the important places. If the government too much to consider political interests, direct or indirect management will translate into financial repression, thereby distorting the market mechanism, and ultimately hurt the corporate finance capabilities. Inhibition of the capital market impact of the following two aspects of corporate finance capabilities: on the one hand, ownership structure affect corporate return on equity. China has been the state-owned enterprises as the main source of listed companies and the share of state-owned shares of enterprises as the only means of control, resulting in distorted ownership structure of listed companies. State-owned shares not in circulation, can not improve business performance, direct damage to the company's financing capacity. On the other hand, the stock price is directly related to corporate financing costs and stock market capital flows. China's share issue price determined, is carried out under the Commission's administrative intervention. Direct control of the Commission's price-earnings ratio on the primary market level, leading to a low of prices of listed companies issued a serious act, such a low price level increases the cost of direct financing of enterprises. At the same time a planned issuance amount of management, the approval system levels also increased the cost of direct financing of enterprises. Taking into account the amount allocated to local economic development, taking into account regional balance and other non-economic factors. Result, enterprises struggle limits, often takes a lot of money for packaging, public relations, thereby increasing the cost of issue.
visible, financial repression may hamper economic development, in turn, limits the sluggish economy and the accumulation of capital and the needs of the financial industry, which restricts the financial system reform and development. Therefore, our response is clear, were characterized by liberalization, financial reform, to adapt to current economic and financial globalization.

Second, financial liberalization and harm

1, the so-called financial liberalization

Financial liberalization refers to the early 80s western countries after widespread financial deregulation of the financial system and financial markets fully operational, the trend of fair competition. McKinnon presented his The main idea is to relax government control of the financial system, particularly the control of interest rates, real interest rates to fully reflect supply and demand of funds. In this way, investors have to consider financing costs, over and over again and expected return trade-off investment costs. If you are not very optimistic about the prospects of investment projects, spine is not hard, lack of confidence, it will flinch in the face of high interest rates. Finally, the limited inflow of funds into the high efficiency of the project, every penny is spent wisely, allocation efficiency greatly improved. Moreover, the high interest rates encourage people to save the financial system, In short, McKinnon also noted that interest rates and inflation are closely linked, therefore, can not the other. In the elimination of financial repression, to raise interest rates at the same time, must not engage in inflation. Otherwise, once the interest rate higher than inflation, so real interest rates is negative, the elimination of financial repression would be futile good intentions, overtaken by smoke. Specifically expressed in the following four areas: (1) price liberalization. That the abolition of interest rates, exchange rate restrictions, while relaxation of domestic capital and financial institutions, restrictions on access to foreign markets. Let the prices of financial products play a role in market regulation. (2) business liberalization. Which allows various types of financial institutions to cross-business and fair competition. (3) market liberalization. The various financial institutions to relax restrictions on access to financial markets, improve financial market financing tools and techniques. (4) liberalization of capital flows. The relaxation of foreign capital, foreign financial institutions to limit access to their markets. Under conditions of financial liberalization, financial information is more openness, to better reflect market supply and demand, the formation of a more effective price system. More important is to reduce the product, the barriers to the flow of funds between banks, so that the allocation of resources closer to optimization. Therefore, the financial liberalization reforms on the efficiency of existing financial markets of developing countries to enhance and deepen the financial system to meet the demand for efficient operation of the real economy, has played a positive role in promoting.

2, blind to the dangers of financial liberalization on developing countries

McKinnon and financial deepening financial repression theory, after a big hit , as the theoretical basis for many developing countries, embarked on a national financial system deepen. Since 1989, Thailand was characterized by a series of financial liberalization in the financial system. Specifically: (1) cancel the interest rate management system, the implementation rate of the free market pricing. (2) relax restrictions on commercial banks to allow commercial banks to expand their business to commercial banks by the separation of the system step by step system for conversion to the Almighty. (3) Actively promoting financial market and capital market development, for enterprises to open up new channels of financing. (4) relaxation of exchange controls, the lifting of restrictions on international capital flows, allowing foreign banks and other financial institutions in the country to carry out limited operations.
result, in July 1997, Thailand had to cancel the baht and the U.S. dollar, allowing the baht to float freely. This makes the Thai baht plummeted, and the dollar lost about 50% of the value. After the collapse of the Thai currency, followed by Malaysia, Indonesia, the Philippines,scarpe nike 2011, the severe depreciation of the currency and stock market slumped, the outbreak of the Asian financial crisis, the economies of these countries huge losses. In particular in: Economic growth slowed; debt burdens, companies bear weight; currency crisis led to the financial sector in trouble; a massive outflow of capital; unemployment; political instability.
Thus, on McGinn