Chinese Economic Reform
...reform its economy (Chow). Through its financial reform, China has embraced a market-based financial system by establishing financial institutions and markets (Ito). The financial reform has aimed to develop the economy by acquiring funds necessary for investment, while simultaneously improving the efficiency of investments by allocating capital effectively (Gen-you). By establishing a central bank, developing a financial market system, and opening the financial market to the global community, China’s financial reform has played an important role in the country’s economic growth.
The establishment of the People’s Bank of China as the central bank has allowed China to conduct effective monetary policy. In the first half of the 1990’s, the Chinese economy experienced impressive growth, averaging a 12 percent growth rate over the five-year period. However, this success was overshadowed by an average inflation rate of 12.9 percent for the period (Gen-you). Inflation coupled with exchange rate fluctuations prompted the People’s Bank to implement a tightening of monetary policy. By adjusting the reserve requirement, the central bank lending rate, and by conducting open market operations, the People’s Bank began targeting money supply (Chow). The result was a Chinese economy with a rapid growth rate and a healthy inflation rate: “Moreover, the retail price and the consumer price plunged to 0.8 percent and 2.8 percent respectively in 1997. Yet China still maintained an 8.8 percent economic growth rate that year (Gen-you).” The ability of the People’s Bank to successfully curtail inflation illustrates that monetary policy has impacted China’s real economic growth.
The financial market system that was developed through the financial reform plays an important role in efficiently allocating capital. China’s capital market has flourished since the 1990 founding...
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