Financial Sector Development and Growth: The Chinese Experience

This paper documents the financial and institutional developments of China during the past two decades, when China transformed from a central planning economy to a dynamic market economy.

It empirically examines the relationship between financial development and economic growth in China by employing a panel sample covering 31 Chinese provinces during the transition period 1986-2002.

The paper:

• Provides a brief description of financial sector development in China, including the fiscal and banking industry, corporate bond market, and stock market;
• Discusses other important institutional developments in China over the last two decades;
• Reviews literature, discusses its data and the various proxies that it employs for institutional development across the 31 Chinese provinces;
• Describes methodologies that it uses to calculate these proxies;
• Presents regression results;
• Examines the relationship between institutional development and growth in China.

It finds wide differences in economic growth among the 31 provinces, and that regions associated with stronger growth have more:

• Developed financial markets and institutions;
• Open and easy environments for private and foreign investors;
• Protection of property rights;
• Investment opportunities;
• Complete market institutions.

The paper concludes that further research on the role of institutional development is warranted in order to gain a more conclusive understanding of the finance-growth nexus in a transitional country like China.