Banking System And Economic Growth

At present, Comparative study between China and India has become more and more popular. Needless to say, the difference of development between China and India is subject to many factors.While in modern society, the financial system- especially the commercial banking system, its entity, internal structure and channels have become an important force to economic development.Then, what role do banking system play in India and China development?A large number of China-India "comparator" should not avoid the problem,and this paper attempts to address this issue. From the theoretical level, the current finance-growth relationship researches are mostly on the entire financial system (including banking, capital markets, etc.), and few specific to the commercial banking system, so the theory is incomplete; In addition, these studies are mostly taken from a macro point of view (such as total credit), or micro-level, but not concerned about the credit structure and efficiency which are at meso-level, ignoring channels and mechanisms,and will be difficult to fully measure the actual financial contribution; Finally, the existing literature in the study of relationship between finance and economic growth, essentially donot pay attention to the quality of economic growth, ignoring the way of economic growth. Most of these studies are in English literature countries (particularly the United States), these countries have achieved the transformation of economic growth (from the traditional heavy industrial age to modern industry). Turn to research in banking system of developing countries,it could not neglect the way of economic growth (economic growth quality.) Therefore, in this context, researching and evaluating the relationship between economic growth and commercial banking system in China and India is of a great practical and theoretical significance.This paper will discuss about the banking system-economic development channels,possible mechanisms and effect in detail from the aspect of the evolution of the banking system, bank size, structure, technical efficiency, economic growth and other aspects,, and try to get to know the general mechanism of banking system-economic growth,and make contributions to the theoretical and empirical research results.The article firstly describes the evolution and current status of the banking system in China and India, compares policy, situation of the 2 banking systems, establishing the system and logical basis for further research.And as to compare about two organizations (system), efficiency comparison is an integral part, in the article IV, this paper use parametric and nonparametric methods to compare the efficiency between the 2 countries.The efficiency comparation reflects the ability of operations of the 2 banking system. However, what role does each banking system play in their growth process? Chapter V attempts to solve this problem, talking about the relationship between banking system and economic growth in terms of total amount, which is currently used in many researches. However, these traditional methods focus only on the outside, but negect the context in which economic grow, and ignore the structure, mechanism and quality issues. Therefore, in Chapter VI, this paper will discuss about the banking system's role in the perspective of the growth model.The innovations and conclusions are drawn as follows:(A)The reform of the banking system in China and India are basicly guidelined in accordance with the Washington consensus,focusing on liberalization, stabilization and property changes. However, the reforms do not fully complete—the credit is specified, the state control of the banking system is still not fully loosed. Conserning about the current situation, the openness of the Indian banking system is relatively more than China, and most of the indicators are at the forefront of China.(B)Comparing 2005-2009 X-efficiency which was gotten by parametric and nonparametric method between Chinese and Indian commercial banks,this paper finds that the average efficiency of the China's banking system is higher than India's banking system.This indicates that after 2005,China has greatly enhance the efficiency of the banking industry, and the view that China's financial system are less efficient than India's need to be amended.Adding the factor of risk,this paper finds banking efficiency significantly increase,indicating that risk factors can significantly explain the efficiency of the banking system in the two countries.(C)Proposing a model of endogenous growth, using to explain the bank-economic growth mechanisms and interactions which may lead to multiple steady-state equilibrium.In the empirical test, using the Hsiao (1981) Granger causality test to study the banking system-economic growth linkages.The results show that banking system-economic growth in China is not a two-way causal relationship——banking development push economic growth, but economic growth does not lead to the corresponding development of the banking system.The banking system develop in its own logic.As to India, there is a two-way causal relationship between economical growth and banking system——They are co-ordinated developing,the development of the banking system is caused by economic growth, and growth has brought a corresponding effect to the banking system.(D) Comparing the banking system between the 2 countries from the view of growth style based on the concept of the credit structure, the paper examine the role of banking system playing in economic growth.As to the core difference between the banking system——first, why in the infrastructure investment, China's banks are more than Bank of India; Second, why in the ratio of SME loan, the China banks are lower than Bank of India. This paper presents a hypothesis: in the two developing countries(China and India), due to the scarcity of financial resources, the profit of commercial banks is the increasing function of the deposits they obtain.Thus, the pursuit of deposits is commercial banks'inevitable choice. In the actual operation of the banking system, deposits and loans can not be separated.Since the two countries have different models of economic growth, there are differences in the resource distribution: a lot of money are focused on large projects or enterprises in China; while India's financial resources is scattered in small and medium enterprises and industrial areas. This difference led to the differences of credit structure: In China,a lot of credit funds are put on infrastructure,few funds are set on industrial areas and SMEs; while India is opposite. Because of this difference,the 2 countries'banking system state,efficiency, risk and consequent effects on economic growth show a wide gap——the actual investment efficiency in China's banking sector is lower than Indian banking industry, while the potential risks are much higher than India,and the role it plays in economic growth is less important than Indian banking system. (E) In theory, this paper contribute to the research on banking system-economic growth relationship paradigm.When concerning about the the existing literature on the banking system and economic growth studies,most of these studies have ignored the way of economic growth.A lot of these studies are occuring in English literature countries (particularly the United States), and these countries have achieved the transformation of economic growth.As to economic growth-banking system relationshipin developing countries, it is necessary to considerate the way of economic growth, but not limited to the data itself. This article introduces the concept of credit structure(meso level), different from the traditional macro and micro level. After introducing the concept of credit structure,this paper find the structure and system of the banking system is not the key elements of economic growth,while the economic environment(the growth model) play a key role in the function of banking systemAs to the policy-makers,they should change the the envoriment in which banking system work, but should not rigidly adhere to the banking system reform itself.