Crumbling Financial System

The CIC was buying shares in the Chinese banks because they needed to. Rather than stimulating the economy through direct government-financed packages, the Chinese have been stimulating their economy with loans from the state banks. Chinese banks are flush with money gained through a sophisticated system of financial repression.

Financial repression is a process where the government—through regulations, capital controls, and reserve requirements—limits the investment alternatives for investors and savers. It allows governments to channel investments to political priorities at below-market rates. In the West after World War II, it allowed governments to quickly pay off the mountain of debt incurred during the war. Japan's system was particularly sophisticated since it extended to specific tax incentives and disincentives. In most developed countries today, the free flow of capital allows not only different types of investments, but also investments in different countries. So, financial repression is no longer possible. But not in China.