ABSTRACT
Given the high levels of deficit finance and quasi-fiscal activities undertaken by China’s financial system, why has inflation been so low in China? Transfers from the Chinese banking system in the form of interest subsidies and loan default averaged over 5 percent of gross domestic product (GDP) over the period 1992–1994. Were these transfers to continue, and, at the same time, were depositors not taxed implicitly through financial repression, the entire cost would have to be met from seigniorage revenue. A model of seigniorage from currency issue presented in this paper suggests that inflation would rise to over 40 percent with currency issue as the only source of such financing.
