DP4471 Pitfalls of a State-Dominated Financial System: The Case of China

Author(s): Genevieve Boyreau-Debray, Shang-Jin Wei
Publication Date: July 2004
Keyword(s): chinese economy, feldstein-horioka, financial integration, internal capital market, risk sharing
JEL(s): F30, G10
Programme Areas: Transition Economics, Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4471

This Paper examines pitfalls of a state-dominated financial system in the context of China. These include possible segmentation of the internal capital market due to local government interference and misallocation of capital. First, we employ two standard tools from the international finance literature to analyse financial integration across Chinese provinces. Both tests confirm a similar (and somewhat surprising) picture: capital mobility within China is low! Furthermore, the degree of internal financial integration appears to have decreased, rather than increased, in the 1990s relative to the preceding period. Second, we document that the government tends to reallocate capital from more productive regions towards less productive ones. In this sense, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth.