Financial Development, Growth, and Regional Disparity in Post-Reform China

Publication Date: Aug 2006
Published by: UNU-WIDER
Document Type: Paper (PDF)

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How have deepening financial development and rapid economic growth widened income disparities between the coastal and inland regions of China?

This paper examines the impacts of financial development on China’s growth performance by employing a panel dataset for 29 Chinese provinces over the period of 1990-2001, and applying the generalized method of moment (GMM) techniques.

The paper uses recent and systemic data on China’s financial market and financial intermediation, to provide new evidence on the relationship between financial development and economic growth from a coast-interior perspective.

It states that:

• China’s economic reforms since 1978 have led not only to rapid economic growth, but also to worsening income distribution.
• Preferential government policy, and the concentration of trade and foreign direct investment (FDI) in the coastal areas, have significantly promoted economic growth in these regions, but have also largely left the poor inland regions behind.
• The coast-interior dichotomy and the widening regional income disparity pose serious challenges for China’s future development.

The paper finds that financial development significantly promotes economic growth in coastal regions but not in the inland regions. The weak finance-growth nexus in inland provinces may aggravate China’s regional disparities.

It concludes that to accelerate economic growth in the less-developed provinces and to strengthen the role of the financial sector in the development process of inland regions, effective policy measures have to be set up to improve the efficiency of capital allocation and investments in these areas.