Financial Development And Economic Growth: Evidence From China In 1978-2005

Whether or not the finance development influences economic growth is a key policy problem, which is also a hot topic in western theory field and has been discussed for almost one century. This dissertation investigates whether, how and to what extent the Chinese financial system contributes to economic growth. We focus explicitly on the questions whether finance is supply leading or demand following in China? Which form of financial system is more conducive to China's economic growth? What influence of the Chinese gradual financial liberalization on financial development and economic growth? What role the government should play in the future finance development?Under a VAR modeling framework, this dissertation used Grange(non)Causality test, Johansen's weakly exogeneity test and innovation accounting analysis approach to capture the dynamic relationship between financial development and economic growth in China. The research covers the period 1978-2005, which permits an investtigation on the finance-growth relationship along with the overall effect of financial policy regime. The data span covers the time period of the 1992, at a time when the China government switched the financial policy regimes from financial repression to gradual financial liberalization. The main content of each chapter as following:Chapter 2 presented a survey of this field of literature on the relationship between financial development and economic growth, and provided related new evidence on three theories branch—the relationship between financial development and economic growth, financial system and economic growth and financial policy and economic growth. One of the conclusions derived from this chapter was that, although the recent literature provided valuable insights into the importance of the relationship between financial development and economic growth, there is an urgent need for more detailed country studies to evaluate the impact of country-specific institutional factors appeared on this relationship. One of the issues related to these country-specific factors was the role played by the government.Chapter 3 provided a discussion of the theoretical arguments for government interference in financial markets in the context of standard welfare economic theory. It was concluded that to determine whether government interference in the market is desirable, one must evaluate whether the government will be able lo obtain better information about failures than the market does, and should assess the costs of information gathering and applying policies that aim at interfering in the market. Since these types of conditions are country-specific, it was concluded that the case for or against government interference in financial markets could best be illustrated and analyzed on the basis of a country study.Chapter 4 descriptive review and analysis the of financial development, financial system reform and financial policy change in China during 1978-2005. It was concluded that started from a very low level, financial development in China is impressive. That China developed state-owned bank-dominated financial system has its history inevitability. The authorities have thus far devoted more effort to institutional development than to the process of creating markets. a gradual approach to liberalization has perhaps been postponed for too long and may have led to distortions elsewhere in the economy.Chapter 5 used yearly data of 1978-2005 to examine the impact of financial development on economic growth in China under a VAR modeling framework, which included 5 variables such as labor , physical capital, trade open as well as and total credit and GDP. The results of empirical analysis show that although the financial reform in China was lagged than and promoted by the reform of real economic sectors. during 1978-2005 the financial development has contributed to economic growth. In the long run, financial development becomes the most force in leading economic growth in China.Chapter 6 used quarterly data of 1992 -2004 to further examine the comparative contribution of the two most important financial intermediations in China —the banking sector and stock market to the economic growth. The result shows that banking sector and stock markets have different causality patterns with economic growth. In the short run, there is no directly causality relationship between banking sector and the economic growth, the stock market however do Granger causes the economic growth. While in the long-run, although both banking sector and stock markets have positive effect on economic growth, the influence of stock market development on GDP appear to be much stronger than that of the banking development.Chapter 7 examined the causality relationship between financial liberalization, financial deepening and allocation of capital in China by using quarterly data of 1992 -2005.The result revealed that financial liberalization, rather than financial deepening, improves allocative efficiency of capital, and the bank sector and stock market have different influence on the efficiency of the capital allocation. The banking sector, in the short run has no influence on the allocative efficiency of capital, while in the long run has a negative influence on the allocative efficiency of capital. But the stock market development, regardless in the short run and in the long-run, has positively influenced the efficiency of capital allocation.Chapter 8 summarized the findings and draws policy conclusions. The overall conclusion is that during 1978-2005, financial development in China has become one of the most important facts in leading economic growth. However the contribution of financial development has been made mainly by increasing bank credit scale and the stock market capitalization, the funds source of such kind of financial expand is from domestic higher deposit savings. However, in the efficiency of capital allocation, the contribution of the present financial system to the economic growth in China is extremely limited. The low efficiency of the financial system appears to be a composite of negative and positive effects resulting from relative government financial policies. It is seem that government intervention may play an important role only during a special history period at the beginning of market development.Since the above empirical evidence shows that the stock market can allocate financial resources more efficient than the banking sector, and has much stronger influence on economical growth, it seems that a market-based financial system is more suitable for Chinese economic growth in the long run. Therefore it makes sense for Chinese government to enlarge the role of the stock market in overall financial system and import more resources on capital market development. In short, China should head for market-based financial system from a long-run point of view. However the transitions of Chinese financial system still needs a strongly push by the government.