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4 - Factional Politics and its Financial Implications

Published online by Cambridge University Press:  05 September 2012

Victor C. Shih
Affiliation:
Northwestern University, Illinois
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Summary

How do relatively low inflation in the form of inflationary cycles and chronic inefficiency in capital allocation, two phenomena that suggest different policy making processes, coexist in the same financial system? While manageable inflation rates and the absence of hyperinflation suggest technocratic control over financial policies, chronic inefficiency in the form of high nonperforming loan ratios indicates political intervention in the banking sector. In brief, the answer provided in this chapter – and in the entire work – is that top leaders' desire for power and the uncertain political environment in which they operate compel them to pursue factional politics, which creates the political environment for inflationary cycles and the dearth of significant financial market reform.

This chapter builds on institutional features described in Chapter 3 and on China's elite political dynamics to derive a factional model to explain inflationary cycles and inefficiency in the Chinese financial system. The two types of factions – one endowed with broad membership across the party apparatus and the provinces and the other endowed with technocrats in the central government – compete with one another over the degree of monetary centralization, which induces inflationary cycles. Although the competitions between the generalist and technocratic factions are not zero-sum contests for ultimate control of the party, they have clearly divergent preferences over monetary policies, which compel them to mobilize political resources at their disposal to gain the upper hand. This tense interaction manages to constrain inflation in China.

Type
Chapter
Information
Factions and Finance in China
Elite Conflict and Inflation
, pp. 47 - 63
Publisher: Cambridge University Press
Print publication year: 2007

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