Working Paper: NBER ID: w11214
Authors: Genevieve Boyreau-Debray; Shangjin Wei
Abstract: State-owned financial institutions have been proposed as a way to address market failure, but the recent literature has also highlighted their pathological problems. This paper studies the case of China for pitfalls of a state-dominated financial system, including possible segmentation of the internal capital market due to local government interference and mis-allocation of capital. Even without formal legal prohibition to capital movement across regions, we find that capital mobility within China is low. Furthermore, to the extent some capital moves around the country, the government (as opposed to the private sector) tends to allocate capital systematically away from more productive regions toward less productive ones. In this context, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth.
Keywords: state-owned financial institutions; capital mobility; capital allocation; China
JEL Codes: G1; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government ownership and intervention in the financial sector (G28) | Systematic misallocation of capital (E22) |
| Systematic misallocation of capital (E22) | Capital directed away from productive regions toward less productive ones (F21) |
| Government policies favor less efficient state-owned enterprises (L32) | Negative relationship between capital inflows and regional productivity (F21) |
| Low capital mobility within China (F21) | Lack of significant correlation between local savings and investments (E20) |
| Reduction in government involvement in the financial system (G28) | Enhancement of economic efficiency and growth rates (O49) |