Chinese Financial System Essay

1947 words - 8 pages

Since the early 1980s, China has been undergoing a dramatic economic growth through the reform and opening-market policy. China’s economy acquired an outstanding achievement, precisely, it had kept a continuous annual growth rate exceeding 9% for 30 years (Zhang et al., 2012: 393). Moreover, China overtook Japan to become the second largest economy by measuring Purchasing Power Parity by the end of 2010 (Yao and Zhang, 2011: 206). However, in the meantime, during the period of transition of the Chinese economy, it appears a fact that countering the traditional finance-growth theory and research literature, specifically, a rapid economic growth with a low efficiency financial system. This essay will argue that poor financial system can promote speedy economic growth in China that differs from common findings in the empirical literature. This essay is organized as follows. Firstly, it will briefly introduce the Chinese financial system and its problem followed by examining the possible reasons of rapid growth. Finally, it will analyze the relationship of the Chinese financial system and economy through using AK model.

China’s financial system involves two segments roughly, banking sector and stock market respectively. Even though China has a long history, the banking system was rarely built approximately 60 years ago. Before the transition in 1978, Chinese banking system was characterized by highly leading by unique bank which is the People’s Bank of China both in policy and commercial business (Guizot, 2007: 19). It also mentions that in the late 1970s, China re-established a new system which was divided commercial business work at Big Four stated-owned banks (“the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank”). Big Four experienced low competition and low efficiency due to the policy leading and imbalance allocated sources with their assets dominated around 2/3 in total financial system (Zhang et al., 2012: 396). Similar researches can be found in LLSV (1997a, 1998) and Levine (2002, both cited in Allen et al., 2005: 59), they highlight this enormous and dominated banking system was under developed. In order to decrease the percentage of market share, Chinese government built several joint-equity commercial banks during mid 1990s (Chang et al., 2010: 2755). Moreover, introducing Shanghai stock market and ShenZhen stock market in 1990, in spite of fast growth, the stock market was still smaller and less significant comparing to banking system (Chang et al., 2010: 2755). In addition, according to data of Allen et al. (2005: 70-71), China got (0.12) in overhead cost to total assets remarkable higher than average level (0.05), in contrast, it achieved lowest points in “Structure activity” and “Structure size” and highest point in “Structure efficiency”. As claimed by Demirguc-Kunt et al. (2011), “the financial structure gap is negatively associated with economic activity”. Similarly,...

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