State-owned financial institutions have been proposed as a way to address market failure, though the literature has also highlighted their pathological problems. This paper examines pitfalls of a statedominated financial system in the case of China, including possible segmentation of the internal capital market due to local government interference and mis-allocation of capital. Even without formal legal prohibition to capital movement across regions, we find that capital mobility within China is low. Furthermore, to the extent some capital moves around the country, the government (as opposed to the private sector) tends to reallocate capital systematically away from more productive regions towards less productive ones. In this context, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth.
There are important geoeconomic considerations driving a more proactive Japanese foreign economic policy. In the long term, the goal is to anchor the U.S. to the regional architecture by encouraging its return to TPP. In the medium term it is about developing cooperation among like-minded countries to tame Chinese mercantilism in areas such as excess steel capacity and forced technology transfers.