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We gratefully acknowledge comments from Paul Gruenwald, Markus Rodlauer, and Wanda Tseng.
As discussed further below, data limitations have largely prevented China from inclusion in cross-country studies. The empirical analysis in this paper is based on a provincial data set.
Throughout this paper, references to China are to the Mainland and the term “provinces” refers to the set of 27 provinces, autonomous regions, and municipalities listed in Table 2.
Note, however, that the impact of financial development on private savings is ambiguous theoretically. Efficient risk sharing could lower the savings rate, reducing growth. For example, see the discussion in Pagano (1993).
What follows is a partial review of the macroeconomic literature. There have also been numerous studies investigating the growth/financial development link at the industry and at the firm level. Levine (1997) and Khan and Senhadji (2000) provide more comprehensive surveys.
Econometrically, this is a problem of simultaneity bias, and has been tackled by using instrumental variables or related econometric techniques.
Note that the average stock market capitalization for China shown in the table masks the fact that it has risen sharply in recent years—to a large extent reflecting higher prices—reaching 55 percent of GDP in mid-2001. However, two-thirds of market capitalization is nontradable, and equity issuance is dominated by state enterprises.
Cull and Xu (2000) find that the shift of SOE financing from government transfers to bank credit increased the SOEs’ productivity (at least in the 1980s).
Despite the transfer of a substantial portion (Y 1.4 trillion) in NPLs to the asset management companies (AMCs), the average NPL ratio is estimated at 25 percent. Market estimates are substantially higher.
Whether the large drop in the difference in 1997 is an anomaly is difficult to ascertain absent an extension of the data base beyond 1997.
Since the nonstate credit variable was constructed by regressing total bank loans on the share of SOEs in industrial output, the latter variable is dropped from this regression to avoid multicollinearity issues.
The results from the exercise also confirm earlier findings that per capita incomes of China’s provinces are converging not in the absolute sense but only in the conditional sense. For details, see Dayal-Gulati and Husain (2000), who studied convergence in China’s provinces using average cross-provincial regressions, and Aziz and Duenwald (2001) who used nonparametric estimators.