The Financial System Capacities in China and India

96 Pages Posted: 24 Oct 2008 Last revised: 14 Mar 2012

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Rajesh Chakrabarti

O. P. Jindal Global University

Sankar De

Independent

Jun "QJ" Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Date Written: November 2007

Abstract

In this paper we examine and compare the formal systems of law and finance in China and India and the alternative institutional arrangements and governing mechanisms in the two countries, and the relation between the development of these systems and their economic growth. China differs from most of the countries studied in the law, institutions, finance, and growth literature: Its legal and financial systems as well as institutions are all underdeveloped, but its economy has been growing at a very fast rate. More importantly, the growth in the Private Sector, where applicable legal and financial mechanisms are arguably poorer than those in the State and Listed sectors, is much faster than that of the other sectors. The system of alternative mechanisms and institutions plays an important role in supporting the growth in the Private Sector, and they are good substitutes for standard corporate governance mechanisms and financing channels. Despite its English commonl aw origin and British-style judicial system and democratic government, there is enough documented evidence to suggest that the effective level of investor protection and the quality of legal institutions in India are quite weak as well. Once again, this has evidently not prohibited growth. We find that to a large extent Indian firms conduct business outside the formal legal system and do not rely on formal financing channels from markets and banks for most of their financing needs. Instead, firms across the board, and in particular, small and medium firms, use non-legal methods based on reputation, trust and relationships to settle disputes and enforce contracts, and rely on alternative financing channels such as trade credits to finance their growth. The scope, methodologies, and results of our paper paint a more complete picture of the law-finance-growth nexus and how businesses and investors respond to the limitations of legal system and formal financial system than existing studies.

Keywords: India, law and finance, institutions, growth, banks, markets, SME sector

JEL Classification: O5; K0; G0

Suggested Citation

Allen, Franklin and Chakrabarti, Rajesh and De, Sankar and Qian, Jun and Qian, Meijun, The Financial System Capacities in China and India (November 2007). Available at SSRN: https://ssrn.com/abstract=1260947 or http://dx.doi.org/10.2139/ssrn.1260947

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Rajesh Chakrabarti (Contact Author)

O. P. Jindal Global University ( email )

Sonepat Narela road
Sonepat
Sonepat, Haryana 131001
India

Sankar De

Independent ( email )

Villa 286 bTR
Srisalam Highway
Hyderabad, Telengana
+91 7042662505 (Phone)

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

Meijun Qian

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

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