Banking on Growth Models: China’s Troubled Pursuit of Financial Reform and Economic Rebalancing (Cornell Studies in Money) by Stephen Bell

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INTERACTIONS BETWEEN CHINA'S
GROWTH MODEL AND
THE FINANCIAL SYSTEM

Western descriptions of China’s “market transition,” or of China as an “emerging 
market economy,” tend to overlook the fact that the economy and its market ele-

ments operate under the shadow of state hierarchy. This certainly applies to the 
financial and banking system, and this chapter outlines how this system has been 
constructed by the party-state to primarily serve the needs of the party’s statist 
economic growth model. China’s financial system is primarily one that collects 
together extraordinarily high levels of savings, primarily from the household and 
corporate sectors, and which then channels these savings through the banking 
system, which allocates credit and investments to a range of destinations. The 
distinctive characteristic of this system is that all of its components, including 
savings levels and credit allocations, are strongly influenced by the state and the 
credit requirements of its growth model. 
The management of economies through a combination of statism and mar-

kets, as well as the contribution from the key economic sectors that power an 
economy, is now the focus of an emerging field of “growth model” analysis 
(Baccaro and Pontussen 2016; Hope and Soskice 2016). This chapter explores 
China’s growth model dynamics, particularly its statist, investment-led growth, 
which has increasingly relied on debt funding and which has distorted the bank-

ing and financial system. It was once widely recognized, including by the Chinese 
leadership, that the prevailing growth model and the financial and banking system 
needed to change. As we have seen, Premier Wen outlined his dire “Four Uns” 
warning about the economy in 2007, and Premier Li Keqiang followed up in 

2012, stating that “China has reached a crucial period in changing its economic 
model and [change] cannot be delayed.” (Yao and Qing 2012). For a time after 
the credit surge associated with the GFC, liberalizing changes in the financial 
and banking system and the rise of shadow banks provided a greater flow of 
credit to the private and household sectors, long starved of credit under the 
statist credit system and growth model. An alternative growth model based on 
private-sector expansion and higher levels of domestic consumption appeared 
to be gaining ground. These changes for a time seemed to be highlighting the 
limits to state capitalism as a control mechanism. It has since transpired, how-

ever, that the Xi Jinping regime is now doubling down on the statist growth 
model, a move that will impede China’s economic rebalancing and continue to 
distort the financial system. 
Growth Model Analysis 
Neoclassical economic theory assumes that economic growth is driven by supply-

side factors, such as productivity, labor force participation, and population 
growth. Nevertheless, the structure or composition of economic growth also 
reflects the structure of aggregate demand in the economy and especially the 
major contributions from consumption (public and private), investment, and 
net exports. Baccaro and Pontussen (2016) have pointed to the way in which 
these different components of aggregate demand can define varying “national 
growth models” aimed at spurring economic growth and dealing with growing 
distributive tensions over income shares. These authors focus comparatively on 
an export-led growth model, an investment-led model, and a debt-consumption-

led growth model. In the face of relatively weak domestic demand as a source 
of growth, countries such as Japan, South Korea, and Germany, as well as vari-

ous Nordic countries to varying degrees, have emphasized an export-led growth 
and the associated accumulation of savings and current account surpluses. In 
the last two decades, as argued more fully below, China has combined varying 
degrees of an export-led model with an investment-led growth model, one that 
has repressed domestic demand and consumption and relied on high levels of 
domestic savings. 
Baccaro and Pontussen (2016) argue that under export-led growth models, 
wages and domestic consumption are repressed to aid cost and export competi-

tiveness and to also provide a large pool of savings. China’s domestic consump-

tion is comparatively low compared to GDP, with wages repressed, well below 
the level of productivity growth. China ran small trade surpluses or deficits until 
around 1996 when the surplus started growing. After China entered the WTO 

Banking on Growth Models: China’s Troubled Pursuit of Financial Reform and Economic Rebalancing (Cornell Studies in Money) by Stephen Bell