Financial Development, Growth, and Regional Disparity in Post-Reform China

This paper examines the impacts of financial development on Chinas growth performance by employing a panel dataset for 29 Chinese provinces over the period of 1990-2001, and applying the generalized method of moment (GMM) techniques. The paper uses recent and systemic data on Chinas financial market and financial intermediation, to provide new evidence on the relationship between financial development and economic growth from a coast-interior perspective.It states that:

• Chinas economic reforms since 1978 have led not only to rapid economic growth, but also to worsening income distribution.
• Preferential government policy, and the concentration of trade and foreign direct investment (FDI) in the coastal areas, have significantly promoted economic growth in these regions, but have also largely left the poor inland regions behind.
• The coast-interior dichotomy and the widening regional income disparity pose serious challenges for Chinas future development.

The paper finds that financial development significantly promotes economicgrowth in coastal regions but not in the inland regions. The weak finance-growth nexus in inland provinces may aggravate Chinas regional disparities.It concludes that to accelerate economic growth in the less-developed provinces and to strengthen the role of the financial sector in the development process of inland regions, effective policy measures have to be set up to improve the efficiency of capital allocation and investments in these areas.