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

摘要

State-owned financial institutions have been proposed as a way to address market failure, though the recent literature has also highlighted their pathological problems. This paper examines pitfalls of a state-dominated financial system in the context of China. Those include possible segmentation of the internal capital market due to local government interference and mis-allocation of capital. First, we employ two standard tools from the 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.