China's Economic Growth and Financial Development after Reform and Opening-up

Abstract

In this paper, I analyze China’s economic growth and financial development after 1978’s reform and opening-up, and verify whether convergence hypothesis and financial deepening hypothesis exist by using the provincial data from 1978 to 2014. The main contribution is that I examine regional disparities in China's economic growth and financial development by period, consider the effects of Deng Xiaoping’s Southern Tour Talks in 1992 and China’s accession to the WTO in 2001 on regional economic growth and financial development. The empirical analyses clarify that the convergence hypothesis is valid for the whole sample period of 1978–2014 and the sub-period 2002–2014. Analyses of economic convergence reveal that the poorer provinces have tended to show higher rates of economic growth than the richer provinces during the period 1978–2014, particularly after China’s accession to the WTO in 2001. On the other hand, the financial deepening hypothesis only appears to be valid to the whole period of 1978–2014, which means that the provinces with larger financial sectors have tended to show higher rates of economic growth than the provinces with smaller financial sectors over the long term, but this was not valid for any of the sub-periods considered (1978–1991, 1992–2001, and 2002–2014) due to reforms of SOEs, diversification of corporate financing methods, and changes in China’s economic and financial situation, which prevented bank loans from making a positive impact on economic growth during any one of the sub-periods.