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Pitfalls of a State-Dominated Financial System: The Case of China

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Genevieve Boyreau-Debray
Shang-Jin Wei

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Abstract

State-owned financial institutions have been proposed as a way to address market failure, but the recent literature has also highlighted their pathological problems. This paper studies the case of China for pitfalls of a state-dominated financial system, including possible segmentation of the internal capital market due to local government interference and mis-allocation of capital. Even without formal legal prohibition to capital movement across regions, we find that capital mobility within China is low. Furthermore, to the extent some capital moves around the country, the government (as opposed to the private sector) tends to allocate capital systematically away from more productive regions toward less productive ones. In this context, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11214.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11214

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G1 - Financial Economics - - General Financial Markets
F3 - International Economics - - International Finance

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," NBER Working Papers 13103, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Beoy Kui Ng, 2007. "Banking Reform in China: An Assessment in Macroeconomic Perspective," Economic Growth centre Working Paper Series 0707, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
  3. Arvind Virmani, 2005. "China's Socialist Market Economy: Lessons of Success," Indian Council for Research on International Economic Relations, New Delhi Working Papers 178, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  4. Frederic Mishkin, 2005. "Is Financial Globalization Beneficial?," NBER Working Papers 11891, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
    Other versions:
  6. Richard Podpiera, 2006. "Progress in China's Banking Sector Reform: Has Bank Behavior Changed?," IMF Working Papers 06/71, International Monetary Fund. [Downloadable!]
  7. Panicos O. Demetriades & Jun Du & Sourafel Girma & Chenggang Xu, 2008. "Does the Chinese Banking System Promote the Growth of Firms?," Discussion Papers in Economics 08/6, Department of Economics, University of Leicester. [Downloadable!]
    Other versions:
  8. Arvind Virmani, 2009. "China’s Socialist Market Economy: Lessons for Democratic Developing Countries," Working Papers id:1899, esocialsciences.com. [Downloadable!]
  9. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2008. "Formal versus informal finance : evidence from China," Policy Research Working Paper Series 4465, The World Bank. [Downloadable!]
  10. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," NBER Working Papers 12755, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Sandra Poncet & Walter Steingress & Hylke Vandenbussche, 2008. "Financial constraints in China: firm-level evidence," LICOS Discussion Papers 22608, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
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  12. Du, Jun & Girma, Sourafel, 2009. "Source of Finance, Growth and Firm Size ? Evidence from China," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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