China's Financial Structure And Regional Differences

The improvement of efficiency of financial institutions in China has been significantly affected by the recent strategies of financial development, which care more about the competition of market share and the scale than the improvement of structure and quality. The optimal development strategy for financial institutions requires more emphasis on the adjustment of financial structure so as to increase the efficiency. Nevertheless, most literature on the financial structure and economic growth focuses on the country level, instead of the region level in one country. The imbalance of economic growth across regions in China has led to observed difference across regions. Meanwhile, the imbalance of financial development across regions coexists with the imbalance of economic growth. Obviously, if the difference across regions is overlooked in the current policy-making, then these development policies not only slow down the balanced economic growth with an enlarged regional differential, but also affect the outcome of macroeconomic monetary policies and financial reforms. Therefore, this paper focuses on the financial structure of China and the regional differential in financial development in China. Firstly, the current features of financial structure in China is analyzed from an empirical point of view and compared with other countries. I also evaluate the changes and weakness in financial structure since the economic reform and open policy was adopted in China; Secondly, this paper will explore if the evolution of financial structure in China is consistent with the general relationship between economic growth and financial development. Thirdly, this paper discusses the difference of financial structures across regions, especially that across regions and provinces. I also explore the impact of difference in economic growth between Eastern, Central and Western China on the cross-region differential in financial structure. Finally, this paper studies the impact of financial structure on the specific financial institutions. This paper is organized as follows.Chapter 1 is Introduction. It introduces the research background and the research problem, and explores the policy implication of this research, the research methodology and the analysis framework.Chapter 2 focuses on literature review. It briefly discusses the theory of financial development, financial structure, regional economy, and the literatures studying the relationship between economic growth and financial structure.There are several approaches in the research of financial structure, and different approaches can leads to different policy implications. So I defines the relevant conceptsand measurement of financial structures used in this paper in Chapter 3. The fourth chapter provides an empirical analysis of China's financial structure. The historical features, the relative scale and the changes of financial structure in China are analyzed based on three basic types of financial tools and four major issuers. The structure and the features of evolution of financial tools since the economic reform in China are then compared with those in other countries. The consistency of China's financial structure with the economic growth and the degree of monetization of Chinese economy are also discussed in this chapter.Chapter 5 explores the relations between economic growth and the change of financial structure. Based on the endogenous growth theory, a complete theoretical explanation about the impact of financial structure on the economy growth is provided. This chapter analyzes the factors of economic growth that can be affected by the financial structure, and then examines the structures of money supply, the saving rate and other indexes of financial structure, so as to analyze the role of changes in financial structure on economic growth empirically.The sixth chapter makes some key definitions, such as regions, national financial structure and regional financial structure. Based on these definitions, appropriate methodology and index are used for static and dynamic analysis of the difference between regional financial structures. I regress the difference in regional financial structures on regional economic development and the evolution path of regional industry development, and use the error-correction model to analyze the long run equilibrium and short run equilibrium of financial structure and economic growth empirically for representative provinces in China's three major regions.Chapter 7 investigates the sub-system of financial institutions - banking. This chapter studies the current and historical evolution of cross-regional difference of banking sector. It investigates the regional banking structure and the development of small-medium firms empirically, under a non-clearing credit market. It also analyzes the financial environment of small-medium firms in different regions, based on the comparison of the efficiency of using credit resources. Meanwhile, this chapter studies the determinant of the banking structure in specific time period through cross-section analysis.Chapter 8 and chapter 9 discuss the policy implication. Based on the general evaluation of the consistency of financial structure with economic growth and the current available policy instrument, I propose the path and policies for adjustment of financial structure in China.This paper examines the financial structure in China and the difference amongregional financial structures. The analysis is based on across province data set. Therefore, the extent of the data and the approach that the paper uses to study the regional financial structure differential and regional economic differential are quite original. The multiple-dimensional analysis of this research is beyond the traditional research framework on financial tools. The basic conclusions can be stated as follows:1. Since the economic reform and opening-up, the amount of financial assets in China increased very quickly, and it even grew much faster than GDP; the contribution of direct loans to the finance (FIR) decreased, while the contribution of M2 and securities increased. These facts imply that the degree of economy monetization and the quality of financial structure increases, the consciousness of finance rises, the role of finance in the economy become more and more important; Meanwhile, there are significant impacts of the changes of financial structure on economic growth, especially, the impact of money on economic growth tends to be substantial, as monetary policy has been an important instrument to control credit supply and aggregate demand. Furthermore, the saving ratio, the ratio of saving to investment, and the marginal productivity of capital all highly and positively correlated to the economic growth.2. The intrinsic weakness of financial structure in China is also well observed, that is, virtual assets are increasing; the quality of financial structure is overestimated; the access ability of financial institutions to multiple types of economic agents are limited. The main problems in the financial structure are found as follows: the share of indirect finance is relatively high; the way to increase financial asset is undiversified. Also, financial tools are very scarce; most of financial tools belong to the type of credit-rights, while the development of financial tools for liquidity and risk management is quite slow. The contribution of the financial structure on the economic growth and the adjustment of economic structure changed in the different development periods of the economy, that is, the performance exhibits periodical features. In short run, it is a good way to promote the economic growth by increasing the degree of economy-monetization, but in long run, the economy growth will rely more on the optimization of financial structure in China.3. The imbalance of regional financial structure and the development of financial tools persist. The regional differential of residents is less than that of government and firms. The across province differential of financial structure is small in the central region and its change is quite stable, but this does not happen in the eastern and western regions. The differential of financial structure inside the major region is even bigger than that across major regions, this implies, the partition of current three major regions cannot show the effect of "similar inside and differentiable outside".4. The financial structure and economic growth in China's three major regions are not consistent with each other. The effect of financial structure on economic growth in western region is better than that in central and eastern regions. In the long run equilibrium, the capital contribution on economic growth in eastern region is relatively low. Currently, the capital accumulation in western provinces is not high, which implies a higher contribution of capital to the economy in this region. Meanwhile, the efficiencies of financial structure in central and western regions are also higher than that in eastern region. In short run, the effects of the changes of financial structure and capital on the economy are quite volatile across eastern provinces. This effect is also significant in central provinces, but the effect of investment on the economy is not quite positive in the starting period. Surprisingly, the above effects in western region are all significant.5. With the deeper reform in banking, the industry is becoming highly competitive, the degree of market concentration of banks decreases with an observed trend, the regional differential increased as well. My research find that the changes of the services of stated-owned commercial banks for the small-medium businesses have been seen, by analyzing the degree of market concentration of banks, therefore, it is unfair to argue that the state-owned commercial banks did not provided good services for the small-medium businesses. The growth rates of small-medium businesses across region are quite different from the degree of market concentration of banks, which implies the changes are very obvious. Empirical evidences show that the development of medium businesses positively correlated to the degree of market concentration of banks, although this correlation is not very significant, at least, this shows that the medium businesses are more attractive to the state-owned commercial banks, which implies the attractiveness is stronger than that of the small businesses.6. The inconsistency between financial structure and economic growth in China's three major regions requires the central government to develop differentiated regional financial policies for Eastern, Central and Western China, respectively. For the eastern region, as the economies grow very fast, the policy on financial structure adjustment should focus on adjusting external finance, enlarging the finance openness, improving financial supervision and developing efficient financial markets. For the central and western regions, some fostering policies on financial structure adjustment should be developed, which require the cooperation of the macro-control departments in central government, local governments, banks and relevant market participants.