Is there anything more thrilling than finding out something you took for granted is wrong?
I started this paper with a heavy heart because I knew what it would conclude. I’ve read academic literature before on the subject and the conclusion is always the intuitive one that China’s underdeveloped financial system retards economic growth. Dozy bankers allocating credit to sleazy pals in SOEs can’t produce optimal outcomes. Savers taught to stuff mattresses because deposit rates are artificially suppressed for the greater good hide capital from growth generating businesses. A system where credit is controlled centrally must be flawed. All right, right?
Not so fast. In this paper from Jin Zhang, Lanfang Wang and Jin Zhang, associates of the Nanhai U., the Shanghai U. and H.K U. respectively the authors manage to establish a causal relationship between finance sector reform and economic growth. Impressive because they’ve managed to drill data from 286-cities and proved the relationship robust from the bottom up, at the city level.
My poor understanding, they point out, is the conventional wisdom because most studies were conducted before China’s accession to the WTO in 2001. Their study covers the period 2001~2006 and shows that almost every development move in the financial sector is followed by an improvement in the local economy. Call me sad; but I think that’s a pretty thrilling conclusion.
You can access the paper in full at http://home.ust.hk/~sswang/PDF/Finance%20and%20Growth%202012-01.pdf and there’s a useful summary of the development of the banking system from page-6 or you can just jump to the Conclusion on p-26.
Happy Sunday.