IDEAS home Printed from https://ideas.repec.org/a/eee/chieco/v61y2020ics1043951x18300828.html
   My bibliography  Save this article

Does financial structure matter for economic growth in China

Author

Listed:
  • Liu, Guanchun
  • Zhang, Chengsi

Abstract

Based on an extended neoclassical growth model, this paper explores the endogenous mechanism between financial structure and economic growth. Our theoretical analysis shows that there exists an optimal financial structure evolving to meet different demands of the real economy in the process of economic development. We then investigate whether financial structure matters for economic growth using a panel data of 29 provinces across the eastern, central, and western regions in China from 1996 to 2013. The empirical results show that financial structure has a significant impact on economic growth. However, the effect of financial structure on regional economic growth varies and presents an inverse U-shape. These results confirm the evolving effect of financial structure on economic growth at different stages of economic development.

Suggested Citation

  • Liu, Guanchun & Zhang, Chengsi, 2020. "Does financial structure matter for economic growth in China," China Economic Review, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:chieco:v:61:y:2020:i:c:s1043951x18300828
    DOI: 10.1016/j.chieco.2018.06.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1043951X18300828
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.chieco.2018.06.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kpodar, Kangni & Singh, Raju Jan, 2011. "Does financial structure matter for poverty ? evidence from developing countries," Policy Research Working Paper Series 5915, The World Bank.
    2. Marco Arena, 2008. "Does Insurance Market Activity Promote Economic Growth? A Cross‐Country Study for Industrialized and Developing Countries," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 921-946, December.
    3. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    4. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
    5. Zhang, Chengsi & Zhu, Yueteng & Lu, Zhe, 2015. "Trade openness, financial openness, and financial development in China," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 287-309.
    6. Allen, Franklin & Gale, Douglas, 1999. "Diversity of Opinion and Financing of New Technologies," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 68-89, January.
    7. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, June.
    8. Asli Demirgüç-Kunt & Erik Feyen & Ross Levine, 2013. "The Evolving Importance of Banks and Securities Markets," The World Bank Economic Review, World Bank, vol. 27(3), pages 476-490.
    9. Abrevaya, Jason & Dahl, Christian M, 2008. "The Effects of Birth Inputs on Birthweight," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 379-397.
    10. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
    11. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    12. Boot, Arnoud W A & Thakor, Anjan V, 1997. "Financial System Architecture," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 693-733.
    13. Lee, Chien-Chiang & Lee, Chi-Chuan & Chiu, Yi-Bin, 2013. "The link between life insurance activities and economic growth: Some new evidence," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 405-427.
    14. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    15. Ergungor, O. Emre, 2008. "Financial system structure and economic growth: Structure matters," International Review of Economics & Finance, Elsevier, vol. 17(2), pages 292-305.
    16. Ndikumana, Leonce, 2005. "Financial development, financial structure, and domestic investment: International evidence," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 651-673, June.
    17. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
    18. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    19. Rajan, Raghuram G, 1992. "Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-1400, September.
    20. Arestis, Philip & Demetriades, Panicos O & Luintel, Kul B, 2001. "Financial Development and Economic Growth: The Role of Stock Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 16-41, February.
    21. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    22. Johansson, Anders C. & Wang, Xun, 2014. "Financial sector policies and income inequality," China Economic Review, Elsevier, vol. 31(C), pages 367-378.
    23. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    24. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    25. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Funding growth in bank-based and market-based financial systems: evidence from firm-level data," Journal of Financial Economics, Elsevier, vol. 65(3), pages 337-363, September.
    26. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    27. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    28. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    29. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    30. Kangni Kpodar & Raju Jan Singh, 2011. "Does financial structure matter for poverty?," Post-Print halshs-00666911, HAL.
    31. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 195-209.
    32. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    33. Baum, Christopher F. & Schäfer, Dorothea & Talavera, Oleksandr, 2011. "The impact of the financial system's structure on firms' financial constraints," Journal of International Money and Finance, Elsevier, vol. 30(4), pages 678-691, June.
    34. Robert Cull & Asli Demirgüç-Kunt & Justin Yifu Lin, 2013. "Financial Structure and Economic Development: A Reassessment-super-♣," The World Bank Economic Review, World Bank, vol. 27(3), pages 470-475.
    35. Agnello, Luca & Mallick, Sushanta K. & Sousa, Ricardo M., 2012. "Financial reforms and income inequality," Economics Letters, Elsevier, vol. 116(3), pages 583-587.
    36. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    37. Raghuram G. Rajan & Luigi Zingales, 1998. "Which Capitalism? Lessons Form The East Asian Crisis," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(3), pages 40-48, September.
    38. Stephen L. Parente & Edward C. Prescott, 1991. "Technology adoption and growth," Staff Report 136, Federal Reserve Bank of Minneapolis.
    39. Fenghua Song & AnjanV. Thakor, 2010. "Financial System Architecture and the Co-evolution of Banks and Capital Markets," Economic Journal, Royal Economic Society, vol. 120(547), pages 1021-1055, September.
    40. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2010. "Financial Institutions and Markets across Countries and over Time: The Updated Financial Development and Structure Database," The World Bank Economic Review, World Bank, vol. 24(1), pages 77-92, January.
    41. Lin, Justin Yifu & Sun, Xifang & Jiang, Ye, 2009. "Toward a theory of optimal financial structure," Policy Research Working Paper Series 5038, The World Bank.
    42. Santomero, Anthony M. & Seater, John J., 2000. "Is there an optimal size for the financial sector?," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 945-965, June.
    43. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross & Maksimovic, Vojislav, 2000. "Financial structure and economic development - firm, industry, and country evidence," Policy Research Working Paper Series 2423, The World Bank.
    44. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    45. Stiglitz, Joseph E, 1985. "Credit Markets and the Control of Capital," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 133-152, May.
    46. Kul B. Luintel & Mosahid Khan, 2004. "Are International R&D Spillovers Costly for the United States?," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 896-910, November.
    47. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
    48. Luintel, Kul B. & Khan, Mosahid & Arestis, Philip & Theodoridis, Konstantinos, 2008. "Financial structure and economic growth," Journal of Development Economics, Elsevier, vol. 86(1), pages 181-200, April.
    49. Justin Lin & Xifang Sun & Ye Jiang, 2013. "Endowment, industrial structure, and appropriate financial structure: a new structural economics perspective," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 16(2), pages 109-122.
    50. Levine, Ross, 1991. "Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
    51. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2007. "Finance, inequality and the poor," Journal of Economic Growth, Springer, vol. 12(1), pages 27-49, March.
    52. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
    53. Justin Yifu Lin & Xifang Sun & Ye Jiang, 2013. "Endowment, industrial structure, and appropriate financial structure: a new structural economics perspective," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(2), pages 109-122, June.
    54. Boot, Arnoud W A & Greenbaum, Stuart I & Thakor, Anjan V, 1993. "Reputation and Discretion in Financial Contracting," American Economic Review, American Economic Association, vol. 83(5), pages 1165-1183, December.
    55. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    56. Castro, Fernanda & Kalatzis, Aquiles E.G. & Martins-Filho, Carlos, 2015. "Financing in an emerging economy: Does financial development or financial structure matter?," Emerging Markets Review, Elsevier, vol. 23(C), pages 96-123.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen Haibo & Emmanuel Kwaku Manu & Mary Somuah, 2023. "Examining Finance-Growth Nexus: Empirical Evidence From the Sub-Regional Economies of Africa," SAGE Open, , vol. 13(1), pages 21582440231, February.
    2. Yimin Chen & Yulin Liu & Xin Fang, 2021. "The new evidence of China’s economic downturn: From structural bonus to structural imbalance," PLOS ONE, Public Library of Science, vol. 16(9), pages 1-25, September.
    3. Binfeng Ma, 2022. "The Impact of Environmental Pollution on Residents’ Income Caused by the Imbalance of Regional Economic Development Based on Artificial Intelligence," Sustainability, MDPI, vol. 15(1), pages 1-19, December.
    4. Xia, Changyuan & Chan, Kam C. & Cao, Chunfang & Tan, Youchao, 2021. "Generalized trust, personalized trust, and dynamics of capital structure: Evidence from China," China Economic Review, Elsevier, vol. 68(C).
    5. Bouzayani Rajab & Abida Zouheir, 2024. "Complementarity Relationship Between Foreign Direct Investment, Human Capital Threshold and Economic Growth: State of the 15 Least Developed African Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7216-7236, June.
    6. Liu, Chao & Fan, Yixin & Xie, Qiwei & Wang, Chao, 2022. "Market-based versus bank-based financial structure in China: From the perspective of financial risk," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 24-39.
    7. Nuri Rosmika & Raja Masbar & Sofyan Syahnur & Suriani Suriani, 2022. "The Impact of the Information and Communication Technology and Electricity on Inter-island Interactions in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(4), pages 568-574, July.
    8. Baifang Wang, 2024. "Does Structural Matching between Finance and Law Promote Economic Development?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(5), pages 140-165, September.
    9. Weiming Li & Zhaoyang Cai & Shixiong Cao, 2021. "What has caused regional income inequality in China? Effects of 10 socioeconomic factors on per capita income," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(9), pages 13403-13417, September.
    10. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    11. Liu, Guanchun & Liu, Yuanyuan & Zhang, Chengsi & Zhu, Yueteng, 2021. "Social insurance law and corporate financing decisions in China," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 816-837.
    12. Ying Xie & Minglong Zhang, 2023. "Influence of Clean Energy and Financial Structure on China’s Provincial Carbon Emission Efficiency—Empirical Analysis Based on Spatial Spillover Effects," Sustainability, MDPI, vol. 15(4), pages 1-25, February.
    13. Anwar, Amar & Iwasaki, Ichiro, 2022. "The Finance–Growth Nexus inAsia : A Meta-Analytic Approach," CEI Working Paper Series 2022-03, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    14. Wen, Shiyan & Lin, Boqiang & Zhou, Yicheng, 2021. "Does financial structure promote energy conservation and emission reduction? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 755-766.
    15. Ichiro Iwasaki & Shigeki Ono, 2024. "Economic development and the finance–growth nexus: a meta-analytic approach," Applied Economics, Taylor & Francis Journals, vol. 56(57), pages 8021-8038, December.
    16. Dezhu Ye & Yunjue Huang & Xian Ye, 2023. "Financial Structure, Technology, and Economic Growth: A Structural Matching Perspective," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(1), pages 119-148, January.
    17. Chun Lin & Xin Zhang & Zhaoyang Gao & Yingjie Sun, 2023. "The Development of Green Finance and the Rising Status of China’s Manufacturing Value Chain," Sustainability, MDPI, vol. 15(8), pages 1-25, April.
    18. Amar Anwar & Ichiro Iwasaki, 2023. "The Finance–Growth Nexus in Asia: A Meta-Analytic Approach," Asian Development Review (ADR), World Scientific Publishing Co. Pte. Ltd., vol. 40(01), pages 13-48, March.
    19. Xu Guangdong, 2021. "Reassessing the Literature on the Relationship Between Financial Structure and Economic Growth," Review of Economics, De Gruyter, vol. 72(2), pages 149-182, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ye, Dezhu & Huang, Yunjue & Zeng, Fanqing, 2021. "Does structural matching between finance and the real economy promote economic growth?," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 11-29.
    2. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    3. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
    4. Peia, Oana & Roszbach, Kasper, 2015. "Finance and growth: Time series evidence on causality," Journal of Financial Stability, Elsevier, vol. 19(C), pages 105-118.
    5. Dezhu Ye & Yunjue Huang & Xian Ye, 2023. "Financial Structure, Technology, and Economic Growth: A Structural Matching Perspective," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(1), pages 119-148, January.
    6. Fufa, Tolina & Kim, Jaebeom, 2018. "Stock markets, banks, and economic growth: Evidence from more homogeneous panels," Research in International Business and Finance, Elsevier, vol. 44(C), pages 504-517.
    7. Vinogradov, Dmitri & Makhlouf, Yousef, 2021. "Two faces of financial systems: Provision of services versus shock-smoothing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    8. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    9. Luintel, Kul B. & Khan, Mosahid & Arestis, Philip & Theodoridis, Konstantinos, 2008. "Financial structure and economic growth," Journal of Development Economics, Elsevier, vol. 86(1), pages 181-200, April.
    10. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Staff Working Papers 02-24, Bank of Canada.
    11. Allen, Franklin & Bartiloro, Laura & Gu, Xian & Kowalewski, Oskar, 2018. "Does economic structure determine financial structure?," Journal of International Economics, Elsevier, vol. 114(C), pages 389-409.
    12. Beck, Thorsten, 2003. "Stock markets, banks, and economic development:theory and evidence," EIB Papers 2/2003, European Investment Bank, Economics Department.
    13. Öztekin, Özde & Flannery, Mark J., 2012. "Institutional determinants of capital structure adjustment speeds," Journal of Financial Economics, Elsevier, vol. 103(1), pages 88-112.
    14. Huang, Ho-Chuan (River) & Fang, WenShwo & Miller, Stephen M., 2014. "Does financial development volatility affect industrial growth volatility?," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 307-320.
    15. Chen Haibo & Emmanuel Kwaku Manu & Mary Somuah, 2023. "Examining Finance-Growth Nexus: Empirical Evidence From the Sub-Regional Economies of Africa," SAGE Open, , vol. 13(1), pages 21582440231, February.
    16. Alessio Ciarlone, 2019. "The relationship between financial development and growth: the case of emerging Europe," Questioni di Economia e Finanza (Occasional Papers) 521, Bank of Italy, Economic Research and International Relations Area.
    17. Asli Demirgüç-Kunt & Ross Levine, 2008. "Finance, Financial Sector Policies, and Long-Run Growth," World Bank Publications - Books, The World Bank Group, number 28021.
    18. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    19. Joshua Cave & Kausik Chaudhuri & Subal C. Kumbhakar, 2020. "Do banking sector and stock market development matter for economic growth?," Empirical Economics, Springer, vol. 59(4), pages 1513-1535, October.
    20. Seven, Ünal & Yetkiner, Hakan, 2016. "Financial intermediation and economic growth: Does income matter?," Economic Systems, Elsevier, vol. 40(1), pages 39-58.

    More about this item

    Keywords

    Financial structure; Economic growth; Panel quantile regression;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G00 - Financial Economics - - General - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:chieco:v:61:y:2020:i:c:s1043951x18300828. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/chieco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.