3 China Fdi Sobreira

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Growth-Financial Intermediation Nexus in China

Yu Wen LIN

Irakliy LOBZHANIDZE

Sonja MARDESIC

Axel VALENSI

Reinder WOUDSTRA

17 November 2010


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Introduction

The growth/financial development nexus

1

2

Group3. Growth-Financial Intermediation Nexus in China 2

China's system of financial intermediationEvidence from provincial data

Conclusions

3

4

5


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Context in brief

Growth rates and per capita income differs substantially across

Chinese provinces.Coastal provinces tend to growth much faster than the interior

ones.

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2


Coastal provinces are the ones with the highest relative degreeof non state sector involvement in the economy.

Almost two-thirds of domestic bank credits goes to state sector.

3

4

How does the non state sector finance its rapid growth?


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What are the main features of Chinassystem of Financial Intermediation at

the national level, and how does it

compare with other similar countries?

Questions

Questions and Findings

While the level of financialintermediation in China is relativelyhigh, its generally viewed as inefficient

at converting financial recourses into

productive investments. Non state

Main findings


Do i ering egrees o inancia systemsdevelopment across Chinas provinces

help explain differences in growth

performance? How has Chinas growth

been financed?

What policy implications flow from the

empirical results, especially as they

pertain Chinas financial sector reform

program?

sec ors usua y nance y emse ves

rather than from bank sector or capitalmarkets

Financial system development in fast-growing provinces is much lower than in

less developed ones.

Explanation of interprovincial growthdifferences lies in non state sector

credits.


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Introduction

The growth financial development nexus

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2



Conclusions

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4

5


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How does financial intermediation affect growth?

It can increase the marginal productivity of capital by

collecting information to evaluate investment projects and

by risk sharing.

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It can raise the proportion of savings channelled toinvestment via financial development.

It can raise the private savings rate.

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3


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Theoretical studies on financial development

Liquid liabilities of the financial system to-GDP

Between growth and indicators of financial development.

Cross-country differences in financial development explain a

significant part of cross-country differences of average growthrates

Goldsmith (1969)McKinnnon (1973)Shaw (1973)

Positive relation growth &

financial development

Indicators chosen for testing


Ratio: bank credit/ bank credit+bank domestic assets Ratio: private credit/ domestic credit

Ratio: private credit/ GDP

Appropriate measurement of financial development

Direction of causality financial development-growth Bank based or security based superior for growth?

Both sources of finance are important, as well as strong legaland regulatory system

King and Levine (1993)Levine (1997)

Levine (1999) and others

Outstanding issues in literature


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Introduction


1

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Conclusions

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China's system of financial intermediation

The bank deposit base is very largeFinancial Intermediation in China is largely bank-

based and dominated by four state commercial

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Resources intermediated through bank lending have

been misallocated

Non state sectors has been the most dynamic part ofthe economy

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4


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Indicators of financial development

China India Korea JapanUnited

States

High-Income

Countries

Medium-Income

Countries

Low-Income

Countries

Private sector credit/GDP 40.0 24.1 112.5 65.1 76.7 121.8 41.1 59.6

Deposit money bank

domestic asset/total 80.0 77.3 93.5 87.9 90.2 - - -

In percent, averages over 1993-2000


M2/GDP 121.7 47.5 113.3 48.0 59.1 - 39.3 73.5

Stock market

capitalization/GDP14.1 32.4 32.7 67.8 112.6 81.4 35.4 20.5

Growth in real GDP per

capita8.9 4.8 3.5 0.8 2.5 1.7 1.0 5.2

FDI/GDP 4.8 0.5 0.6 0.1 1.4 1.1 1.8 3.1


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Introduction


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Conclusions

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The level of financial developmenthas not played a key role in Chinese

economic growth

Bank loans go mainly to provinces

Findings

Indicative results from provincial data

Loan-to-GDP ratio is lower inprovinces with above average GDP

growth and vice versa

Provinces with above average level

Empirical results


with many SOEs and low growthrate which means low level of

productivity

SOEs kept intentionally inefficientto limit the social cost of transition

Private sector rely mostly on FDIsand internal savings

experienced lower growth.

Loan-to-GDP ratio is higher inprovinces with above average

concentration of SOEs

Profit-to-GDP ratios is higher inprovinces with above average GDP

growth


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Main results from provincial data

Banking Credit in the faster growing provinces is lower than

in slower growing provinces

Most of bank credits are destined for State-OwnedEnterprises. But Non state bank credit has a significant

1

2


in luence on growthRelevant role of Foreign Direct Investments in Chinas

growth process

Low impact of financial development on domesticinvestment but influence of nonstate banks on productivity

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4


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Introduction


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Conclusions

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Impact on Chinas growth

Financial development (proxied by total bank lending) has

not influenced on growth among Chinas provinces

Non state credit has had a significant impact on growth.

1

2


Nonbank sources o inance i.e. FDI have played asignificant role in financing Chinas growth.

Enterprise internal savings have also financed Chinas

growth

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Implications for Chinas financial system reform

Higher proportion of savings should be channeled to Nonstate sector1


adoption of market-based principles

The non state sectors access to equity and debt financing

should be enhanced.

3


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Thank you for your attention!



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Do you think China will ever catch up (GDP per


capita wit t e West I yes, in w ic term


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What do you think will happen if China


continues t e way it oes


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If the Banking system and the allocation of


,

hard time in the future to continue its current

growth.

3 China Fdi Sobreira

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