Financial Repression and Economic Reform in China (review)

482 China Review International: Vol. 3, No. 2, Fall 1996 in-depth analysis of available data and information would be expected, but this has not been done. The two sections nevertheless provide aggregate data on different sectors of the tourism industry in China. Part 3 on ethnic Chinese tourists is an important contribution. Given China's huge population, travel by Chinese citizens is already a thriving domestic industry . Outbound travel to other countries is only in its beginning stage, and China is already ranked as the fourth largest tourist-generating country in Asia. Additional analyses on domestic and outbound travel by Chinese citizens would have been valuable to academicians and industry professionals due to the enormous market potential of this tourist group. The case studies in part 4 attempt to depict Chinese situations within the framework ofWestern paradigms. The development of tourism in China involves conflicts between Chinese and Western ways of thinking, and this dilemma will not be resolved by Westernizing China. Instead ofits current title, a more appropriate one might have been "Perspectives on Tourism in China." The reader would then not expect a comprehensive , in-depth analysis of tourism in China, which is still needed to augment the existing body ofliterature. Dexter J. L. Choy University of Hawai'i Dexter Choy is a professor in the School ofTravel Industry Management and specializes in tourism development in the Asia and Pacific region. mi Kui-Wai Li. Financial Repression and Economic Reform in China. Westport: Praeger Publishers, 1994. 208 pp. Hardcover $55.00, isbn 0-275-94801-3. In order to subsidize borrowing by both the government and its favored sectors, many developing countries have set artificially low interest rates through state control over banking. As Giovannini and de Melo (1993) show, the implicit government revenue alone from this is quite substantial in some countries. Beginning with McKinnon (1973) and Shaw (1973), a substantial literature has grown up© 1996 by University studying and debating this strategy, which has come to be known as financial reofHawai ? Presspression.1 Proponents offinancial liberalization have argued, first, that financial repression reduces private savings and increases capital flight. Second, financial repression creates a shortage of financial capital that favors established firms and Reviews 483 encourages excess investment by those able to get access through nonmarket rationing , resulting in a dual economy and significant economy-wide inefficiency. Finally, it discourages financial deepening, the development ofand increased reliance on financial institutions and instruments, encouraging instead the growth of relatively inefficient informal credit networks. This harkens back to Schumpeter's (1934) argument that a fundamental precondition for economic development is the development offinancial institutions to intermediate between savers and investors ;2 financial markets promote technological innovation and induce a more efficient allocation of scarce financial resources. A novel effort that applies this framework to the People's Republic of China has come forth from Kui-Wai Li,3 in order to test the hypothesis that China is a financially repressed economy. His book begins by first introducing the reader to the literature on financial repression since the McKinnon-Shaw hypotheses were advanced; this literature largely favors financial liberalization, but is concerned with measurement problems and the implementation of the solution. From the literature review, he goes on to use a significant amount of the book to review Chinese macroeconomic reforms and performance during the first decade of economic reform, from Deng Xiaoping's ascendance through Tiananmen. This section is largely descriptive in order to establish and describe the relationships that he will later examine using standard econometric methods. He points out that shortages offoreign exchange, non-price rationing ofinvestment, and the government's budget deficit are all consistent with financial repression, as is the pattern ofnegative interest rates for both depositors and borrowers. He then reviews the development of China's equity market from the early 1980s through the Shenzhen riots in 1992, and counsels that government should allow and encourage participation in stock markets as a method of financial liberalization outside the formal banking sector. The heart of this book is the introduction of a series of simple and straightforward single equations that he asserts will allow him to test the McKinnonShaw hypotheses. One key element...