Growth-Financial Intermediation Nexus in China

Yu Wen LIN
Irakliy LOBZHANIDZE
Sonja MARDESIC
Axel VALENSI
Reinder WOUDSTRA

17 November 2010
1 Introduction
2 The growth/financial development nexus
3 China's system of financial intermediation
4 Evidence from provincial data
5 Conclusions

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Context in brief

1 Growth rates and per capita income differs substantially across

Chinese provinces.
2 Coastal provinces tend to growth much faster than the interior
ones.
3 Coastal provinces are the ones with the highest relative degree
of non state sector involvement in the economy.
4 Almost two-thirds of domestic bank credits goes to state sector.

How does the non state sector finance its rapid growth?

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Questions and Findings

Questions Main findings

• While the level of financial
• What are the main features of China’s
intermediation in China is relatively
system of Financial Intermediation at
high, its generally viewed as inefficient
the national level, and how does it
at converting financial recourses into
compare with other similar countries?
productive investments. Non state
• Do differing degrees of financial systems sectors usually financed by themselves
development across China’s provinces rather than from bank sector or capital
help explain differences in growth markets
performance? How has China’s growth
• Financial system development in fast-
been financed?
growing provinces is much lower than in
• What policy implications flow from the less developed ones.
empirical results, especially as they
• Explanation of interprovincial growth
pertain China’s financial sector reform
differences lies in non state sector
program?
credits.

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1 Introduction
2 The growth financial development nexus
3 China's system of financial intermediation
4 Evidence from provincial data
5 Conclusions

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How does financial intermediation affect growth?

1 It can increase the marginal productivity of capital by

collecting information to evaluate investment projects and
by risk sharing.

2 It can raise the proportion of savings channelled to

investment via financial development.

3 It can raise the private savings rate.

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Theoretical studies on financial development

Positive relation growth &

financial development Between growth and indicators of financial development.
Goldsmith (1969) Cross-country differences in financial development explain a
McKinnnon (1973) significant part of cross-country differences of average growth
Shaw (1973) rates

Indicators chosen for testing • Liquid liabilities of the financial system to-GDP
King and Levine (1993) • Ratio: bank credit/ ∑ bank credit+bank domestic assets
Levine (1997) • Ratio: private credit/ domestic credit
• Ratio: private credit/ GDP

Outstanding issues in literature • Appropriate measurement of financial development

• Direction of causality financial development-growth
• Bank based or security based superior for growth?
Levine (1999) and others • Both sources of finance are important, as well as strong legal
and regulatory system

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1 Introduction
2 The growth financial development nexus
3 China's system of financial intermediation
4 Evidence from provincial data
5 Conclusions

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China's system of financial intermediation

1 The bank deposit base is very large

Financial Intermediation in China is largely bank-
2 based and dominated by four state commercial
banks(SCBs)

3 Resources intermediated through bank lending have

been misallocated

4 Non state sectors has been the most dynamic part of

the economy

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Indicators of financial development
In percent, averages over 1993-2000
United High-Income Medium-Income Low-Income
China India Korea Japan
States Countries Countries Countries

Private sector credit/GDP 40.0 24.1 112.5 65.1 76.7 121.8 41.1 59.6
Deposit money bank
domestic asset/total 80.0 77.3 93.5 87.9 90.2 - - -
domestic assets
M2/GDP 121.7 47.5 113.3 48.0 59.1 - 39.3 73.5

Stock market
14.1 32.4 32.7 67.8 112.6 81.4 35.4 20.5
capitalization/GDP
Growth in real GDP per
8.9 4.8 3.5 0.8 2.5 1.7 1.0 5.2
capita

FDI/GDP 4.8 0.5 0.6 0.1 1.4 1.1 1.8 3.1

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1 Introduction
2 The growth financial development nexus
3 China's system of financial intermediation
4 Evidence from provincial data
5 Conclusions

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Indicative results from provincial data
Empirical results
• Loan-to-GDP ratio is lower in
provinces with above average GDP
growth and vice versa
• Provinces with above average level
of financial intermediation
experienced lower growth.
• Loan-to-GDP ratio is higher in
provinces with above average
concentration of SOEs
• Profit-to-GDP ratios is higher in
provinces with above average GDP
growth
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Findings
• The level of financial development
has not played a key role in Chinese
economic growth
• Bank loans go mainly to provinces
with many SOEs and low growth
rate which means low level of
productivity
• SOEs kept intentionally inefficient
to limit the social cost of transition
• Private sector rely mostly on FDIs
and internal savings
12
Main results from provincial data

1 Banking Credit in the faster growing provinces is lower than

in slower growing provinces

2 Most of bank credits are destined for State-Owned

Enterprises. But Non state bank credit has a significant
influence on growth

3 Relevant role of Foreign Direct Investments in China’s

growth process

4 Low impact of financial development on domestic

investment but influence of nonstate banks on productivity

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1 Introduction
2 The growth financial development nexus
3 China's system of financial intermediation
4 Evidence from provincial data
5 Conclusions

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Impact on China’s growth

1 Financial development (proxied by total bank lending) has

not influenced on growth among China’s provinces

2 Non state credit has had a significant impact on growth.

3 Nonbank sources of finance (i.e. FDI) have played a

significant role in financing China’s growth.

4 Enterprise internal savings have also financed China’s

growth

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Implications for China’s financial system reform

1 Higher proportion of savings should be channeled to Non

state sector

2 The efficiency of bank lending should be raised through the

adoption of market-based principles

3 The non state sector’s access to equity and debt financing

should be enhanced.

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Thank you for your attention!

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Do you think China will ever catch up (GDP per
capita) with the West? If yes, in which term?

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What do you think will happen if China
continues the way it does?

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If the Banking system and the allocation of
credit is not revised, will China have a very
hard time in the future to continue its current
growth.

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