Development of Financial Intermediation and Economic Growth Chinese Experience

Using Chinese provincial data from 1985 to 1998 and applying recent GMM techniques developed for dynamic panels, this paper examines how the development of financial intermediation influences China’s economic growth during the post-1978 reform period. Our econometric results show that China’s financial intermediation development contributes to its rapid economic growth through two channels: the substitution of loans for state budget appropriation and the mobilization of households savings, but not through loan expansion since loan distribution by financial intermediaries is inefficient. Deep financial sector reform aiming at correcting this inefficiency is desirable, and is expected to sustain China’s economic development in the future.