Why financial deregulation was bad for OECD countries but will be good for China?

There is a theory that financial deregulation may be bad for China.  The idea is that when liquidity constraints on households are removed, people may save less, and if high saving/investment  rate is important for rapidly growing countries such as China, China may lose steam as a result of financial sector deregulation.

This is true in the history. Empirical results suggest that financial deregulation in the 1980s has contributed to the decline in national saving and growth rates in the OECD countries.

China however is a different case. She already saves too much, and now everyone agrees that domestic demand/consumption  needs to be jump started. Chinese financial sector is also terribly inefficient, and deregulation of financial sector will improve it mostly in asset allocation front instead of consumer lending front.  For cultural reasons, it is also hard to convince Chinese consumers to take out loans from banks to increase spending.

Currently consumer lending has very small share in Chinese banks’ loan portfolio. This is increasing over time because banks are seeing it as a more profitable and safer business, and foreign banks (e.g. Citibank) are particularly interested in developing products for high net-worth consumers and the rapidly emerging middle class.

Anyway, I can see no reason why cost of financial deregulation (in reducing saving rates) will outweigh its benefit (in increasing consumption and transform China’s economic growth  into a demand-driven model)

Saving, Growth, and Liquidity Constraints
By Tullio Jappelli and Marco Pagano (published in the Quarterly Journal of Economics)
Abstract : In the context of an overlapping-generations model, the authors show that liquidity constraints on households (1) raise the saving rate, (2) strengthen the effect of growth on saving, (3) increase the growth rate if productivity growth is endogenous, and (4) may increase welfare. The first three positions are supported by cross-country regressions of saving and growth rates on indicators of liquidity constraints on households. The results suggest that financial deregulation in the 1980s has contributed to the decline in national saving and growth rates in the OECD countries.