Influences of China’s Financial Liberalization on Economic Growth

Influences of China’s Financial Liberalization on Economic Growth

China’s financial structure has kept changing since 1978 when government started financial reform. Before 1978, the People's Bank of China is the only banking financial institution, and the government execute most functions of financial structure. China’s present financial structure inside an economy that is making transition from a centrally planned economy to a market economy has two incompatible features: first, China’s financial structure is changing into it in market economy; second, the distribution of financial resources mainly regulated by government’s will but not by market forces. After years of development in financial institutions and financial markets, the bank-dominated financial structure become a structure that lead by state-owned banks, supported by other commercial and policy banks, surrounded by various financial markets. China’s banking system is still mainly controlled by four largest state-owned banks. All of these ‘big four’ banks have become publicly listed and traded companies in recent years, with the government being the largest shareholder and retaining control. Government controls interest rate and manages credit allocation instead of let market force affect them naturally; this leads to financial impression in China. During 38 years’ reforming, China has maintained high economy growth with fluctuations. In the meantime, government has promulgated policies like: raise the proportion of direct financing, build the mechanism of market-orientation interest rate and the system of market interest rate. These policies are beneficial to let market forces affect financial system and received effectiveness. The proportion of direct financing is 17% in 2014, the scale is 3% in 2003. People’s bank of China successively opened Shanghai interbank offered rate, deposit and loan interest rate of local and foreign currency, deposit and loan interest rate of wholesale and retail, and deposit and loan interest rate of all financial institutions. How can these effects transmute China’s economy, and whether the reformed financial structure is suitable for current economy?

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The existing literature discusses possible influences that different financial structures affect economic growth from analysis characteristics of various financial institution arrangements. However, diverse financial institution arrangements have advantages and disadvantages about mechanism and approach on mobilize savings, spread risks and allocate resources. Unilaterally talk about specialties of each financial structure is difficult on confirm which financial structure is better for economic growth. For analysis the relationship between financial structure and economic growth, it is necessary to start at the role of real economy and financial structure. The needs of financial services systematically differ from real economies that are at different stages of economic development. (Justin Yifu Lin, Sun Xifang, Jiang Ye, 2009)