The Economic Role of the Chinese Government: Between the Centralized Political System and Decentralized Markets

Abstract

China’s centralized political system has tried to adapt to alien decentralized markets in the past few decades, and the economic role of government is at the centre of the adaptation. This paper compares the economic role of Chinese government now to that in the early 1990s, and finds that the Chinese government does not always adjust its economic role to accommodate market reforms. In some cases, reforms had been reluctantly allowed but reverted soon after they served the intended purposes. In the case of capital market development, the government is only willing to accept very limited changes. Financial liberalization seems to be inconsistent with China’s centralized political system because financial market volatilities can lead to uncontrollable political risks and a well-functioned capital market can impose hard budget constraints on local governments, both of which are regarded as undesirable because they will weaken state capacity.