China's Model of Managing its Financial System


Brunnermeier, Markus K., Michael Sockin, and Wei Xiong. “China's Model of Managing its Financial System”. China's Model of Managing its Financial System Working Paper: n. pag. Print.


China's economic model involves active government intervention in financial markets. We develop a theoretical framework that anchors government intervention on a mission to prevent market breakdown and 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 by making noise in its intervention program an additional factor driving asset prices, and can divert investor attention toward acquiring information about this noise factor rather than fundamentals (as a result of complementarity in investors' information acquisition). Through this latter channel, the widely-adopted objective of government intervention to reduce asset price volatility may exacerbate,
rather than improve, information efficiency of asset prices.

Last updated on 10/04/2018