Description

In this paper, I estimate the size of the Chinese government’s contingent liabilities in the corporate and financial sectors and explore the monetary and welfare implications of these liabilities. Looking broadly at all the liabilities in the formal financial system, debt owed by state-owned entities total over 60 trillion RMB as of late 2010. Because the government turns out to be the greatest ultimate debtor for much of this enormous pool of debt, the government has incentive to structure monetary policy so as to minimize the impact of this large pool of liabilities on the government’s formal balance sheets. In the process, however, households in China end up paying a large tax associated with excess liquidity in the system and ultimately inflation. This effect goes against China’s long-term goal to have domestic consumption as the main engine of growth.

Victor C. Shih is a political economist at Northwestern University specializing in China. An immigrant to the United States from Hong Kong, Dr. Shih received his doctorate in Government from Harvard University, where he researched banking sector reform in China with the support of the Jacob K. Javits Fellowship and the Fulbright Fellowship. He is the author of a book published by the Cambridge University Press entitled Factions and Finance in China: Elite Conflict and Inflation. It is the first book to inquire the linkages between elite politics and banking policies in China. He is further the author of numerous articles appearing in academic and business journals, including The China Quarterly, Comparative Political Studies, Journal of Politics, The Wall Street Journal and The China Business Review, and frequent adviser to the financial community on the banking industry in China. Dr. Shih holds a B.A. from the George Washington University, where he studied on a University Presidential Fellowship and graduated summa cum laude in East Asian studies with a minor in economics. His current research concerns Chinese banking policies, exchange rates, elite political dynamics and local government debt in China.