The paper "China’ s Economic Development" is a perfect example of a micro and macroeconomic case study. China’ s central government controls the country’ s banking sectors and it ensures that capital is given to the industries that it considers to be important to the economy. Most of the credit is given to state-owned enterprises at the expense of private firms that are forced to look for loans in other areas which usually have high-interest rates (Morrison 31). He further adds that most state-owned enterprises do not repay these loans thus affecting the growth of the banking sector due to the high number of non-performing loans. Although external borrowing is an important source of capital for all developing economies, excessive borrowing can lead to huge debts.
Many sub-national governments in China borrow from financial institutions so that they can get the capital to support projects that help to boost the local economies such as infrastructural projects (Morrison 31). Excessive borrowing leads to a strain on the financial sector and it needs to be sorted. The economy sometimes faces money supply issues. The government can increase the amount of money in circulation by loosening the monetary policies which will enable the banks to increase their lending (He, Wang, and Xiangrong 3).
For example, PBOC can advise the commercial banks to reduce the bank rates which is the interest that they charge on their loans. If the bank rate is low, people will borrow more thus, increasing the amount of money in circulation. The people’ s disposable income continues to fall in China this is in part caused by poor policies adopted by the banks. According to Morrison (34), the Chinese government restricts the exportation of capital forcing the people to put a huge share of their savings on the domestic banks.
The government then sets the interest rates on the deposits which usually fall below the inflation rate thus, leading to low income for the households. With low disposable income, the people are not able to invest thus, denying them an opportunity to improve their standards of living. The People’ s Bank of China (PBOC) reduces the reserve requirement ratio for all banks in China with the aim of boosting the lending rates and the growth rate.
This reduces the amount of money that the banks should keep in PBOC which in turn increases the money that these banks can lend to the people.
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