A Research On The Influence Of Financial Development On Poverty Reduction In China

Since the reform and opening up, China’s economic and financial developmenthas achieved unprecedented success. The income of urban and rural populationincreases continuously and people living basically reaches a comfortable level. Chinamade great achievements in poverty reduction. But at this stage many rural areas stillhave a lot of poor people, poverty is not optimistic. With the rapid economic growth,rural finance has also been developing. Financial development has become animportant support for economic growth, and an important means to optimize theallocation of resources in rural areas. Whether there is a link between financialdevelopment and poverty reduction? If they have relations, what channels doesfinancial development affect poverty reduction? What kind of impact does financialdevelopment have on poverty reduction? Studying the impact of China’s ruralfinancial development on poverty reduction, not only clears interaction between thetwo, but also helps our country to draw up related poverty reduction policies fromfinancial aspects. This will open up an efficacious way for China’s poverty alleviationwork.Firstly, this article summarized home and abroad literature on the relationshipbetween financial development and poverty reduction, based on this, having atheoretical analysis on the transmission mechanism of how financial developmentaffect poverty reduction from direct and indirect aspects. The direct impact is“Mckinnon Conduit Effect”, while the indirect impact is that financial developmentcan promote economic growth and economic growth benefits the poor through“trickle-down effect” and “pro-poor growth”. Then this paper focuses on thedevelopment status of China’s rural finance and poverty, and the empirical researchbetween the two. Given the availability of data, this article collected the1978-2009related rural data, using FGT poverty indicators, the private credit indicator, percapita GDP growth, Gini coefficient to measure rural poverty, rural financialdevelopment, rural economic development level and rural income distribution. ThenJohansen co-integration test and error correction model were respectively used toanalyze impact of financial development on poverty from two long-term andshort-term points of view. And impulse response function was used to furthercharacterize the dynamic relationship between them.The empirical results show that there is a long-run equilibrium relationship between rural financial development and rural poverty incidence, poverty depth andpoverty strength, and financial development has a significant negative effect on them.The rural financial development is conducive to poverty reduction. But in the shortterm, there is a non-significant and positive relationship between financialdevelopment and poverty incidence, poverty depth and poverty strength, which meansthat financial development doesn’t reduce poverty in the short term. From the point oflong-term, economic growth has negative impacts on poverty reduction, while theGini coefficient and poverty reduction have positive relations. This means thatChina’s rural economic growth is helpful to poverty reduction, and inequality inincome distribution is harmful to poverty reduction. But from the point of short-term,economic growth and FGT poverty indicators have non-significant and positiverelations, while Gini coefficient has non-significant and negative effect on povertyincidence and poverty depth and significant negative influence on poverty strength.This shows that economic growth doesn’t reduce poverty in the short term, instead,the income inequality can do. Finally, based on the empirical analysis, this papermade a lot of policy recommendations to reduce poverty taking the advantage of therural financial development.