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China's Model of Managing the Financial System

Author

Listed:
  • Markus K. Brunnermeier
  • Michael Sockin
  • Wei Xiong
Abstract
China's economic model involves active government intervention in financial markets. We develop a theoretical framework in which interventions prevent a market breakdown and a volatility explosion caused by the reluctance of short-term investors to trade against noise traders. In the presence of information frictions, the government can alter market dynamics since the noise in its intervention program becomes an additional factor driving asset prices. More importantly, this may divert investor attention away from fundamentals and totally toward government interventions (as a result of complementarity in investors' information acquisition). A trade-off arises: government's objective to reduce asset price volatility may worsen, rather than improve, information efficiency of asset prices.

Suggested Citation

  • Markus K. Brunnermeier & Michael Sockin & Wei Xiong, 2020. "China's Model of Managing the Financial System," NBER Working Papers 27171, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27171
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    References listed on IDEAS

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    3. Shan, Chenyu & Tang, Dragon Yongjun & Wang, Sarah Qian & Zhang, Chang, 2022. "The diversification benefits and policy risks of accessing China’s stock market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 155-175.
    4. Li, Lu & Liu, Chunbo & Xu, Yongxin & Zhang, Xiaoyan & Zheng, Gaoping, 2024. "Crisis rescue via direct purchase: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 165(C).
    5. Li, Hui & Liu, Kerry, 2024. "China's National Team: A Game Changer in Stock Market Stabilization?," Finance Research Letters, Elsevier, vol. 61(C).
    6. Huang, Shao’an & Qiu, Zhigang & Wang, Gaowang & Wang, Xiaodan, 2022. "Government intervention through informed trading in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    7. Zhu, Minchen & Lv, Dayong & Wu, Wenfeng, 2022. "Market stabilization fund and stock price crash risk: Evidence from the post-crash period," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    8. Wang, Jun & Song, Xiuna, 2022. "The effect of limited attention and risk attitude on left-tail reversal: Empirical results from a-share data in China," Finance Research Letters, Elsevier, vol. 46(PA).
    9. Jin, Ling & Li, Zhisheng & Lu, Lei & Ni, Xiaoran, 2023. "Does stock market rescue affect investment efficiency in the real sector?," Journal of Financial Markets, Elsevier, vol. 65(C).
    10. Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2022. "Stabilizing the Financial Markets through Informed Trading," MPRA Paper 115470, University Library of Munich, Germany.
    11. Shi, Yang & Chen, Shu & Liu, Ruiming & Kang, Yankun, 2022. "Fund renaming and fund flows: Evidence from China's stock market crash in 2015," Economic Modelling, Elsevier, vol. 108(C).

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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