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Macroeconomic effects of financial reform on resource reallocation: Evidence from China

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  • Zhu, Xiaolu

Abstract

This paper quantitatively evaluates the macroeconomic impact of financial reform on resource reallocation in China using a general equilibrium model that incorporates heterogeneity across private and state sectors, as well as key features of China’s distorted financial system. The findings show that financial reform promotes private firm entry and facilitates resource reallocation both within and between the private and state sectors, resulting in significant gains in aggregate total factor productivity and output. Most of these gains arise from intensive-margin reallocation, particularly within the private sector. Credit market development has contributed more to improvements in aggregate TFP and output than equity market reform. The analysis also reveals substantial potential benefits from further reductions in financial distortions. Specifically, eliminating credit market frictions could raise aggregate TFP by 3% and output by 15%. Additional gains may also be achieved through continued equity market reform.

Suggested Citation

  • Zhu, Xiaolu, 2026. "Macroeconomic effects of financial reform on resource reallocation: Evidence from China," Economic Modelling, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:ecmode:v:154:y:2026:i:c:s0264999325003499
    DOI: 10.1016/j.econmod.2025.107354
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