Fiscal Decentralization, Local Government Intervention And Regional Financial Development

The30years’reform and opening process in China has made great achievements in our economic construction. As the catalyzer for the economic growth, finance is undoubtedly one of the most important factors that make out economy grow healthily. Fiscal decentralization reform, which began in the1980s, change the political environment of central and local government affiliation. From then on, the local government became the independent economic bodies, pursuing their own economic interests. However the fiscal decentralization reform, especially the tax system reform in1994, has cut off the connect between the fiscal revenue and fiscal expenditure, resulting the unparallel situation of the financial power and the responsibility of the local government. It created the possibility and willingness for the financial intervention, which further impacted on the local financial system.This dissertation first distinguish between financial constraints and financial repression, introduce the theory of financial rent that to some extent explain the government behavior. Based on the common theory of fiscal decentralization and government behavior, we establish a theoretical analysis framework for research on the relationship between local government and financial development with the fiscal decentralization system. By local government,bank and enterprise incorporated into the framework of a theoretical model, studying how the local government behavior affects the allocation of credit between the the power-based relationship loan, the market-based relationship loan and the transaction type loan. We find the intervention of the local government actually reduce the efficiency of bank credit allocation, which further make the developmental efficiency of banking system and financial markets low. On the basis of theoretical analysis, we collect panel data from1985to2010across7provinces. From the point of view of the empirical research, we study whether local government will intervene financial market because of financial pressure or the purpose of protect state-owned enterprises and whether this intervene is actually against the efficiency of the regional financial development. At last, according to the conclusion, we give some advice to try to solve the problems mentioned.This dissertation is divided into six parts:The first chapter is the introduction. The second chapter introduces the common theory of fiscal decentralization, government intervention and financial development. In the third chapter, we give the theoretical model of local government behavior and financial development. The fourth part first presents the historical analysis of the local government behavior under three consecutive periods, talking about the historical origin and different forms of local government behavior. Then through examining the motives and methods of government behavior, we analyze the recent situation. In the fixth chapter, according to the selected provincial panel data, we establish three econometric models, using the Stata software to empirically analyze the impact of financial pressure and protection of state-owned enterprises on the local government intervention, we also analyze the impact of such intervention on financial development. Both provide empirical support to the conclusion we has made.