Essay emphasizes the role of monetary policy & the banking system in fueling China’s growing inequality .. “China has a hybrid banking system that serves both political and commercial goals. It relies on collateral instead of on profitability, distorting capital allocation in favor of large assets holders instead of efficient holders. This often produces the problem of overcapacity and ‘survival of the fattest’. It is not surprising that this creates inequality through rent-seeking. Certain agents receive special treatment and have preferential access to newly created credit. Those agents are mostly well connected insiders in the state sector .. China’s monetary policy — characterized by financial repression — is based on the government setting interest rates below the inflation rate most of the time. Financial repression acts as a redistributive machine, transferring purchasing power from savers to debtors. But China’s financial repression also covers its exchange rate policy by forcibly sterilizing foreign exchange. This means that only sellers of foreign exchange receive liquidity, but the externalities from excessive leverage are shouldered by the whole economy. Unfortunately, this gives rise to a coalition of interest groups whose incentives are aligned to the increased role of credit in China’s economy.”

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