REGIONAL FINANCE AND REGIONAL DISPARITIES IN CHINA

What is it about?

China’s growth has been spectacularly high and persistent over the last few decades.However, there have been regular expressions of concern about the uneven distribution of the benefits across regions and, at times, it has been asserted that the regional distribution of available investment funds has played an important role – national financial institutions (mainly state-owned banks) have redirected deposits from the inland to loans to large institutions in the more prosperous coastal regions. At the same time, smaller regionally-focussed institutions are likely to improve the distribution of funds. We use a panel data set disaggregated by province for the years 1986 to 2004 to test these propositions. We employ recent panel unit roots and cointegration tests using data for state-owned bank loans as well as loans by rural credit cooperatives. We find that financial disparities are related to output disparities, that this relationship is positive, that it is stronger for rural credit cooperatives than for state-owned banks and that this relationship is causal in both the long and short runs. A reduction in financial disparities can be expected to lead a narrowing of output disparities in the short run and in the long run with the effect being larger for rural credit cooperatives than for state-owned commercial banks.

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Why is it important?

The analysis presented in this paper was motivated by the oft-heard but little researched complaint that output disparities between provinces in China are at least partly the result of the financial system (dominated by the large state-owned commercial banks) which siphons funds from the inland provinces and lends them to large firms in the more prosperous coastal provinces. Moreover, it is likely that smaller regionally-focussed institutions such as rural credit cooperatives are more effective in addressing regional inequalities.