
Understanding China’s “financial policy”
In most developed countries macroeconomic management is the domain of separate fiscal and monetary policies. In China, the focus is on “financial policy”, a combination of credit, monetary and regulatory policies with powerful direct effects on growth and stability. This “financial policy” has critically shaped the structural development of the economy, fostering particularly state-owned enterprises, heavy industry, and real estate. It has left the economy with a difficult legacy of inefficient credit allocation, bloated shadow banking, and financial systemic risk in the real estate sector. Reforms since 2016 seek to normalize China’s macroeconomic policies but have created severe tensions between the objectives of deleveraging and sufficient growth.