Financial Liberalisation and Growth in China’s Economic Reform

R ECENT studies (Borensztein and Ostry, 1996; Chow, 1993; and World Bank, 1997) document that the rapid growth in China since the early 1980s is accompanied by productivity increase in labour and capital. Evidence on the improvement in industrial productivity of state and collective sectors (Chen et al., 1988a and 1988b, Jefferson, 1989; and Jefferson, Rawski and Zheng, 1992 and 1994) was contrasted by the unrealistic reporting of outputs and inputs (Woo, Fan, Hai and Jin 1993 and 1994). These studies, however, do not provide the productivity of individual financial sources of investment. The financial liberalisation advocates argued (for example, McKinnon, 1973 and 1991; and Shaw, 1973) that an equally important constraint is institutional rigidity and government intervention in the opportunity cost of financial capital. Financial liberalisation in China is characterised by a gradual decline in the state sector and a growing importance of collective, individual and foreign enterprises. This paper analyses the efficiency of financial capital to economic growth in China. We estimate the effect of total and individual sources of fixed asset investment (state budget appropriation, national bank loans, self-raised funds, and foreign investment) on the growth of GDP and industrial production. Section 2 summarises China’s financial liberalisation experience since reform. Section 3 discusses the four sources of financial investment. Sections 4 and 5, respectively, present the econometric model and show the empirical result. Section 6 discusses the various financial and policy implications, while the final section concludes the paper.