Financial Development and Economic Growth: The Case of Chinese Banking Sector

Katarzyna Burzynska

14 citations0/0 files storedLund University Publications Student Papers (Lund University)

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Banking Systems and Strategies

Abstract

China’s economy has developed rapidly since the introduction of market reforms in 1978. In parallel came the reforms within the financial sector and the most of financial intermediation between savings and investment has been channelled through the banking sector. Thus far studies on the finance-growth nexus in China have focused on the financial sector as a whole. This thesis aims to determine the impact of different banking institutions on economic growth and assess the compatibility of state financial policies with country’s economic performance. The empirical analysis is performed using annual data for the period 1978 to 2005. Using the Granger-causality test procedure under vector autoregressive model I examine the relationship between economic growth and, respectively, different types of banks and different types of loans. The procedure provides evidence that presence and direction of causality is affected by the type of bank as well as type of loan. There is two-way causality between economic growth and policy banks as well as rural credit cooperatives. The development of state-owned commercial banks and other commercial banks merely follows economic growth. Furthermore, loans to construction sector Granger cause growth and there is a one-way causality between growth and loans to commercial sector. The fact that policy banks manage to positively influence China’s development might indicate that state policies concerning financial sector and economic growth are successful. However to sustain the growth it is important to further develop financial services, ensure better credit allocation and improve access to financing for private as well as small and medium-sized enterprises.

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References

1986Increasing Returns and Long-Run Growth 1989Endogenous Technological Change 1991Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models n.d.Financial Development and Economic Growth: Views and Agenda 1974Shaw, Edward S., Financial Deepening in Economic Development, New York, Oxford University Press, 1973, xii + 260 pp. ($7.50 cloth, $3.50 paper)1970Financial Structure and Development.2005Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market 2003Bank regulation and supervision: what works best?

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