Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.http://deepblue.lib.umich.edu/bitstream/2027.42/39654/3/wp270.pd

Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems that exploit regional financial and economic data. Derived from a model of bank profit maximization, the tests are based on the expectation that in efficient systems, financial intermediation should not be overly influenced by policy variables; should be greater where projects are more profitable and require greater financing - typically in faster growing, richer, industrial areas; and should direct funds to the best projects regardless of where deposits originate. We apply these tests to Chinese provincial data from 1991-97 for all state banks, the Agricultural Bank of China, rural credit cooperatives, and other financial institutions. China implemented a series of widely publicized financial reforms in the mid-1990s designed to improve bank performance. However, descriptive and estimation results suggest that the importance of state bank policy lending (to support SOEs and finance agricultural procurement) has increased, not fallen, during the recent period, and lending does not respond to economic fundamentals. Only the group of smaller, less-regulated financial institutions appear commercially oriented. Despite reforms, significant barriers to efficient inter-regional financial intermediation remain.

Banks vs. budgets: Credit allocation in the People's Republic of China, 1984-1997.

The analysis of fiscal systems has provided political scientists with a rich empirical base from which to draw conclusions about political outcomes. The need of the ruler for revenue has been used to explain the emergence of parliamentary democracy, to show the evolution of property rights, to assess in more general terms the capacities of the state as well as to examine relative power distributions in multi-tiered national or regional settings. I argue that state access to alternative sources of capital, such as through the domestic banking system, leads to different conclusions about political outcomes. More specifically, issues of state capacity, as they impact state-society relations and the relationship between central and local governments are distinctly different when analyzed in the context of domestic banking rather than taxation. In China, a state-controlled banking system channels far more resources into the economy than are (re)distributed via the state budget. Since the late 1980's the ratio of capital mobilized by financial institutions versus the state budget is approximately 4:1. Consequently I argue that what matters in assessing the relative power of governments at different administrative levels is not so much who controls the tax collector but who controls the bank official. The dissertation analyzes the ways in which governments exercise control over the domestic banking system. In China's transition economy they rely in part on levers that are remnants of the planned economy and in part on new policy instruments available to policymakers in market economies. Following a review of the legacies of banking in the planned economy, I discuss the ability of the state to influence the operations of the banking system with regard to ownership and licensing of financial institutions, central bank re-lending and monitoring of bank behavior. Contrary to current explanations, I argue that control over the domestic banking system, not exclusively budgetary revenue, determines a state's ability to structure the allocation of economic resources. This is relevant to understanding the politics of economic transitions and financial deepening in a variety of other national settings.Ph.D.Asian historyBankingFinancePolitical scienceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/131781/2/9929946.pd

Tests of Financial Intermediation and Banking Reform in China.

We develop tests of financial intermediation by national banking systems based on the expectation that, in commercial systems, financial intermediation should not be overly influenced by policy variables; should be greater in richer, faster growing industrial areas; and should direct funds to the best projects regardless of where deposits originate. Using Chinese provincial data from 1991 to 1997, we test whether financial reforms in the mid-1990s increased efficient intermediation by different financial institutions. We find that the importance of policy lending by state banks did not fall during the recent period and that lending by financial institutions did not respond to economic fundamentals