Finance-growth Nexus in China: A Channel Decomposition Analysis

Li, Jia (2009): Finance-growth Nexus in China: A Channel Decomposition Analysis. Published in: ICCS Journal of Modern Chinese Studies , Vol. 1, No. 1 (23 March 2009): pp. 51-82.

Abstract

This study aims to reassess the finance-growth nexus debate in China, and consequently illustrate the channels through which financial development gives impact on China’s economic growth after 1978. Specifically, this study addresses two channels through which the effects operate, i.e., physical capital accumulation and productivity improvement. The study adopts an approach called channel decomposition which combines the conventional accounting framework and regression analysis. The empirical analysis, using a panel dataset of Chinese provinces between 1980 and 2004, argues that: (1) the relationship between financial development and economic growth in China tends to be a long-run one; (2) the direction of causality between financial development and economic growth has presumably run from the former to the latter in China; (3) the impacts induced by various measures of financial system exert on economic growth are different, and the channels through which they give impact on the growth are different as well; (4) the existence of inter-regional heterogeneity in the context of China’s finance-growth nexus tends to be sensitive to the selection of financial variables.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial development, economic growth, nexus, channel decomposition
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

References

Allen, Franklin, Jun Qian and Meijun Qian. 2005. Law, Finance, and Economic Growth in China. Journal of Financial Economics. Vol. 77 (1): 57-116.

Andersen, Thomas Barnebeck, and Finn Tarp. 2003. Financial Liberalization, Financial Development and Economic Growth in LDCs. Journal of International Development. Vol. 15 (2): 189-209.

Arestis, Philip, and Panicos Demetriades. 1997. Financial Development and Economic Growth: Assessing the Evidence. The Economic Journal.Vol. 107 (442): 783-799.

Aziz, Jahangir and Christoph K Duenwald. 2002. Growth-Financial Intermediation Nexus in China. IMF Working Paper No. 02/194.

Beck, Thorsten, and Ross Levine. 2004. Stock Markets, Banks, and Growth: Panel Evidence. Journal of Banking & Finance. Vol. 28 (3): 423-442.

Beck, Thorsten, Ross Levine, and Norman Loayza. 2000. Finance and the Sources of Growth. Journal of Financial Economics. Vol. 58 (1-2): 261-300.

Bencivenga, Valerie R., and Bruce D. Smith. 1991. Financial Intermediation and Endogenous Growth. The Review of Economic Studies. Vol. 58 (2): 195-209.

Benhabib, Jess, and Mark M. Spiegel. 2000. The Role of Financial Development in Growth and Investment. Journal of Economic Growth. Vol. 5 (4): 341-360.

Bosworth, Barry, Susan M. Collins and Yu-chin Chen. 1995. Accounting for Differences in Economic Growth. Brookings Institution - Working Papers, No. 115. Paper prepared for the October 5-6, 1995 conference Structural Adjustment Policies in the 1990s: Experience and Prospects, organized by the Institute of Developing Economies, Tokyo, Japan.

Boyreau-Debray, Genevieve. 2003. Financial Intermediation and Growth: Chinese Style. World Bank Working Paper No. 3027.

Chang, Tsangyao. 2002. Financial Development and Economic Growth in Mainland China: A Note on Testing Demand-Following and Supply-Leading Hypothesis. Applied Economics Letters. Vol. 9 (13): 869-873.

Cheng, Xiaoqiang and Degryse, Hans. 2006. The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China. Center for Transition Economics, LICOS Discussion Papers, 171/2006. Katholieke Universiteit Leuven.

Chow, Gregory and Kui-Wai Li. 2002. China's Economic Growth: 1952-2010. Economic Development and Cultural Change. Vol. 51 (1): 247-256.

Dayal-Gulati, Anuradha and Aasim Husain. 2000. Centripetal Forces in China’s Economic Take-off. IMF working papers No. 00/86.

Demirguc-Kunt, Asli and Ross Levine. 2008. Finance, Financial Sector Policies, and Long-run Growth. World Bank Policy Research Working Paper, WPS 4469.

Detriades, Panicos, and Khaled Hussein. 1996. Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries. Journal of Development Economics. Vol. 51 (2): 387-411.

Ezaki, Mituso and Lin Sun. 1999. Growth Accounting in China for National, Regional, and Provincial Economies: 1981-1995. Asian Economic Journal. Vol. 13 (1): 39-71.

Fan, Xuejun, Jan Jacobs and Robert Lensink. 2005. Chicken or Egg: Financial Development and Economic Growth in China, 1992-2004. CCSO Working Papers, No. 200509. Center for Economic Research, University of Groningen.

Fischer, Stanley. 1993. The Role of Macroeconomic Factors in Growth. Journal of Monetary Economics. Vol. 32 (3): 485-512.

Frankel, Jeffrey A. and David Romer. 1999. Does Trade Cause Growth? The American Economic Review. Vol. 89 (3): 379-399.

Goldsmith, Raymond. 1969. Financial Structure and Development. New Haven: Yale University Press.

Greenwood, Jeremy, and Boyan Jovanovic. 1990. Financial Development, Growth, and the Distribution of Income. The Journal of Political Economy. Vol. 98 (5): 1076-1107.

Guillaumont Jeanneney, Sylviane, Hua, Ping and Zhicheng Liang. 2006. Financial Development, Economic Efficiency, and Productivity Growth: Evidence from China. The Developing Economies. Vol. 44 (1): 27-52.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2002. Does Local Financial Development Matter? NBER Working Paper No. 8923.

Hall, Robert E., and Charles I. Jones. 1999. Why Do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of Economics. Vol.114 (1): 83-116.

Hao, Chen. 2006. Development of Financial Intermediation and Economic Growth: The Chinese Experience. China Economic Review. Vol. 17 (4): 347-462.

King, Robert G., and Ross Levine. 1993. Finance and Growth: Schumpeter Might Be Right. The Quarterly Journal of Economics. Vol. 108 (3): 717-737.

Lardy, Nicholas R. 1998. China’s Unfinished Economic Revolution. Brookings Institute Press, Washington, D.C.

Levine, Ross. 2005. Finance and Growth: Theory and Evidence. In Handbook of Economic Growth. Edited by Philippe Aghion and Steven N. Durlauf. 865-934. Elsevier B.V.

Levine, Ross. 1997. Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature. Vol. 35 (2): 688-726.

Levine, Ross, Norman Loayza, and Thorsten Beck. 2000. Financial Intermediation and Growth: Causality and Causes. Journal of Monetary Economics. Vol.46 (1): 31-77.

Levine, Ross, and Sara Zervos. 1998. Stock Markets, Banks, and Economic Growth. The American Economic Review. Vol. 88 (3): 537-558.

Liang, Qi and Teng Jian-Zhou. 2006. Financial Development and Economic Growth: Evidence from China. China Economic Review. Vol. 17: 395-411.

Liang, Zhicheng. 2005a. Financial Development, Market Deregulation and Growth: Evidence from China. Journal of Chinese Economic and Business Studies. Vol. 3 (3): 247-262.

Liang, Zhicheng. 2005b. Financial Development, Growth and Regional Disparity in Post-reform China. Presented at the ICCS Journal of Modern Chinese Studies Vol.1 (1) 2009 82 UNU-WIDER project meeting Inequality and Poverty in China. Helsinki, 26-27 August 2005.

Luintel, Kul, and Mosahid Khan. 1999. A Quantitative Reassessment of the Finance- Growth Nexus: Evidence from a Multivariate VAR. Journal of Development Economics. Vol. 60 (2): 381-405.

Patrick, Hugh. 1966. Financial Development and Economic Growth in Underdeveloped Countries. Economic Development and Cultural Change. Vol. 14 (2): 174-189.

Perkins, Dwight Heald. 1988. Reforming China’s Economic System. Journal of Economic Literature. Vol. 26 (2): 601-645.

Ram, Rati. 1999. Financial Development and Economic Growth: Additional Evidence. Journal of Development studies. Vol. 35 (4): 164-174.

Rioja, Felix, and Neven Valev. 2004. Finance and the Sources of Growth at Various Stages of Economic Development. Economic Inquiry. Vol. 42 (1): 127-140.

Shan, Jordan. 2005. Does Financial Development 'Lead' Economic Growth? A Vector Auto-Regression Appraisal. Applied Economics. Vol. 37 (12): 1353-1367.

Shan, Jordan Z., Alan G. Morris, and Fiona Sun. 2001. Financial Development and Economic Growth: An Egg-and-Chicken Problem? Review of International Economics. Vol. 9 (3): 443-454.

Tavares, Jose, and Romain Wacziarg. 2001. How Democracy Affects Growth. European Economic Review. Vol. 45 (8): 1341-1378.

Tsai, Kellee. 2002. Back-Alley Banking: Private Entrepreneurs in China. Cornell University Press.

Wang, Yan and Yudong Yao(2003): Sources of China's Economic Growth 1952–1999: Incorporating Human Capital Accumulation. China Economic Review, Vol. 14 (1): 32-52.

Wong, Wei-Kang. 2007. Economic Growth: A Channel Decomposition Exercise. Topics in Macroeconomics. Berkeley Electronic Press. Vol. 7 (1): 1464-1464. World Bank. 1989. World Development Report 1989: Financial Systems and Development. Washington, D.C. Oxford University Press.

Zhang Jun, Guanghua Wan and Yu Jin. 2007. The Financial Deepening-Productivity Nexus in China: 1987-2001. Journal of Chinese Economic and Business Studies. Vol. 5 (1): 37-49.

Zhang, Xiaobo and Kong-Yam Tan. 2004. Reform and the Transformation of Rents in China. Paper presented in the conference Growing Inequality in China, Cornell University, USA, September 25-26, 2004.