Working Paper: CEPR ID: DP4471
Authors: Genevieve Boyreau-Debray; Shangjin Wei
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 analyse 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; Feldstein-Horioka; Financial integration; Internal capital market; Risk sharing
JEL Codes: F30; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low capital mobility within China (F20) | high correlation between local savings and local investment (E20) |
| decrease in internal financial integration in the 1990s (F30) | high correlation between local savings and local investment (E20) |
| government reallocates capital from more productive regions to less productive ones (H77) | low capital mobility within China (F20) |
| reduction in government intervention in the financial sector (G18) | enhance economic efficiency and growth (O49) |