Financial Repression,Financial Liberalization And "Middle Income Trap"

Financial system reform is a key part of China’s reform which is undertaken currently, as well as an aspect which is being actively explored. The same as most developing countries, there is serious "Financial Repression" in China. The government takes strict control of financial markets, sets interest rate and exchange rate artificially, and rations out financial resources by non-market way, such as government orders and intervention. Theories of Financial Development has concentrated on financial repression of developing countries, and reached a conclusion that "Financial Deepening" or "Financial Liberalization" could speed up economic growth. However, numerous international experience has told us that, the majority of these countries, trapped in the "Middle Income Trap", didn’t take no reform action, but the financial reform failed. On contrary, these did across the "Middle Income Trap", have done a good job in financial reform.This research of China’s economic growth is on the perspective of financial repression and financial liberalization, meanwhile,"Middle Income Trap" is a specific problem at the current development stage of China. On the marketization of interest rate, this research analyzes the economic loss coursed by financial repression and the relationship between financial repression and economic growth of China, to answer three questions:1) What is the relationship between financial repression and economic growth of China?2) It is the exact time for financial liberalization?3) How to arrange financial liberalization properly to ensure that China can across the "Middle Income Trap"?This research investigated both the positive and negative effect of Financial Repression to economics growth. Firstly, It modified Galbis’s model to fit the situation of China, and derived a new two sector model of financial-economic growth. It explained the negative effect of financial repression to economic growth, because of low interest rate and credit quotas, and supported that financial liberalization could speed up economic growth. It also derived that the government should take marketization reform of interest rate, to improve the capital utilization and rate of return, and also to improve the quality of investment. Secondly, based on the discussion of the investment demand curve, this research proposed a possibility that Financial Repression can speed up economics growth, and that’s a reason for China’s rapid growth. Furthermore, this research uses the recent30years’data of China for an econometric test, by Fry’s method, and obtains a different conclusion, which is that China is different with these countries trapped in the "Middle Income Trap" in1970s. The low interest rate doesn’t have such a great impact on China’s economic growth, the saving rate is not declining, and the later maybe can explain the former. To investigate more deeply, it is the best time for China to financial liberalization currently, and it’s important to keep things under control for a successful crossing the "Middle Income Trap". In the end, there is a framework of how to control the financial liberalization, as a reference or suggestion financial liberalization reform of China.