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

47 Pages Posted: 10 Aug 2004  

Genevieve Boyreau-Debray

World Bank

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

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 analyze 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.

Keywords: Chinese economy, internal capital market, financial integration, Feldstein-Horioka, risk sharing

JEL Classification: F30, G10

Suggested Citation

Boyreau-Debray, Genevieve and Wei, Shang-Jin, Pitfalls of a State-Dominated Financial System: The Case of China (July 2004). CEPR Discussion Paper No. 4471. Available at SSRN: https://ssrn.com/abstract=574541

Genevieve Boyreau-Debray

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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