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Tests of Financial Intermediation and Banking Reform in China

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  • Park, Albert
  • Sehrt, Kaja

Abstract

We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 29 (2001)
Issue (Month): 4 (December)
Pages: 608-644

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Handle: RePEc:eee:jcecon:v:29:y:2001:i:4:p:608-644

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Web page: http://www.elsevier.com/locate/inca/622864

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  1. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  2. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series, The World Bank 1083, The World Bank.
  3. Fan, G. & Woo, W.T., 1993. "Decentralized Socialism and Macroeconomic Stability: Lessons from China," Research Paper, World Institute for Development Economics Research 112, World Institute for Development Economics Research.
  4. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series, Economics and Finance Section, School of Social Sciences, Brunel University 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series, The World Bank 1083, The World Bank.
  6. Loren Brandt & Xiaodong Zhu, 2000. "Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(2), pages 422-451, April.
  7. Albert Park & Scott Rozelle, 1998. "Reforming state-market relations in rural China," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 6(2), pages 461-480, November.
  8. Shahid Yusuf, 1994. "China's Macroeconomic Performance and Management during Transition," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(2), pages 71-92, Spring.
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