Chinese Financial System

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Since the early 1980s, China has been undergoing a dramatic economic growth through the reform and opening-market policy. China’s economy acquired an outstanding achievement, precisely, it had kept a continuous annual growth rate exceeding 9% for 30 years (Zhang et al., 2012: 393). Moreover, China overtook Japan to become the second largest economy by measuring Purchasing Power Parity by the end of 2010 (Yao and Zhang, 2011: 206). However, in the meantime, during the period of transition of the Chinese economy, it appears a fact that countering the traditional finance-growth theory and research literature, specifically, a rapid economic growth with a low efficiency financial system. This essay will argue that poor financial system can promote speedy economic growth in China that differs from common findings in the empirical literature. This essay is organized as follows. Firstly, it will briefly introduce the Chinese financial system and its problem followed by examining the possible reasons of rapid growth. Finally, it will analyze the relationship of the Chinese financial system and economy through using AK model.

China’s financial system involves two segments roughly, banking sector and stock market respectively. Even though China has a long history, the banking system was rarely built approximately 60 years ago. Before the transition in 1978, Chinese banking system was characterized by highly leading by unique bank which is the People’s Bank of China both in policy and commercial business (Guizot, 2007: 19). It also mentions that in the late 1970s, China re-established a new system which was divided commercial business work at Big Four stated-owned banks (“the Industrial and Commercial Bank of China, Agricultural Bank of Chi...

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