The Theoretical And Empirical Analysis Of Regional Financial Discrepancy

Finance is the core of modern economies. Without the support of the financial market, economic development will be impossible. There exists a very close relationship between the enlargement of the difference in regional economic development and the changes in regional financial structure and development. Therefore, recently, more and more attention has been paid to regional financial differences. Based on the literatures in finance, regional economics, and financial geography, this paper provides empirical and theoretical analysis of the current situation of regional financial differences, the causes of these differences, and the future trend of these differences.First, by constructing a comprehensive financial development index which covers the three major financial industries including banking, security and insurance, and uses the provincial administrative area and the three big districts as the regional unit, the paper show that there exist substantial differences in financial development across different regions in China. These differences are not only present among provincial areas, but also exist across East China, Middle China and West China.Second, this paper investigate the causes of differences in regional financial structure and development. Based on the financial contract theories, this paper analyzes the major factors that affect the financial development, including the economic development, the degree of financial liberalization (financial system), and the credit environment, etc.. Then, using the cross-sector data in China, this paper test the relationship between financial development and these influential factors. The result shows that these factors do help to explain the differences in regional financial development. Moreover, from the result of the econometric analysis, currently in China the degree of financial liberalization is the most important factor in explaining the regional financial development.Third, this paper explore the future trend of differences in regional financial development. Will these differences become larger or smaller in the future? The paper provide answers to this question based on both theoretical and empirical analysis. Theoretically, we follow the framework we use to study the factors that affect the regional financial development and explore how these major factors will change over time across regions. The paper find that in the long run, the differences in regional financial development depend on the interaction of different mechanisms. In any economy, there exist mechanisms which lead to the convergence of the regional financial development. Meanwhile, other mechanisms which cause the divergence of the regional financial difference are also present. Thus, these does not exist a definitive direction/trend for changes in differences across regional financial development. That is, we cannot say for sure in the future the regional financial development will converge (differences will become smaller) or diverge (difference will become larger). This conclusion is also supported by theories in disciplines that emphasize the spacial concepts, such as the financial geography literature. They argue that the difference in financial development across regions is objective. There exist mechanisms that lead to the convergence and divergence of financial development in each economy. Ultimately, the trend of future changes depends on the interaction of opposite forces. To prove our theoretical prediction, we use two different methods (two different indexes) to describe the changes of regional financial differences in China during 1978-2004. This exercise will provide empirical support for the above theoretical analysis. Results from both analysis show that the regional financial development differences follows the U-shape during this period. That is, the regional financial differences decrease first, and then increase again, which is consistent with the result of our theoretical analysis.Finally, the paper provide some policy suggestions based on the above empirical and theoretical analysis. Local governments should form a rational understanding of differences in regional financial development. Due to the inconsistence between the administrative area and the economic area, the regional financial difference based on administrative area unit does not imply that the financial service needed for local economic development is insufficient. As to how to reduce the gap in the regional financial development, The paper argue that local government should keep liberalizing local financial institution and markets so as to deepen financial intermediation and capital markets, improve the local credit environment, and work hard to cultivate local advantages in financial intermediation.