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E1

The paper elaborates the relationship between the financial development and the economic growth in China with the help of researches that are carried out by many proficient researchers (Zhang, Lanfang and Susheng, 2012). Allen (2005 cited in Zhang, Lanfang and Susheng, 2012), an eminent researchers has commented that China has been an important example of flourishing economy who have experienced the fastest growth in finance in more than 30 years. But it should be noted that the financial sector is governed by the state and is underdeveloped even today. The relationship between financial development and economic growth is generally negative. With the help of the provincial data between the period of 1990 to 1999 Boyreau-Debray (2003 cited in Ljungwal and Li, 2007) indentified that financial intermediation has affected the local economic growth negatively. Hasan, Wachtel and Zhou (2009 cited in Ljungwal and Li, 2007) with the help of provincial data for the period 1986 to 2002 has also pointed out the fact that finance sector has negatively affected the economic growth of the country. But Chen (2006 cited in Ljungwal and Li, 2007) has argued the fact. By using the provincial data for the period of 1985 to 1999 had showed that financial development of China has contributed positively to the growth of the economy (Choong and Chan, 2011). He also examined the two channels, which contributed to the economy to be “the substitution of loans for budget appropriation mobilization of savings” (Zhang cited in Lanfang and Susheng, 2012). With the help of the provincial data of 1995to 2003, Cheng and Degryse (2007 cited in Zhang, Lanfang and Susheng, 2012) has examined the effect of expansion of the non-bank financial institutions and the banks on the local economic growth. He indentified that the development of the banks has positively affected the economic growth of China. Guariglia and Poncet (2008 cited in Zhang, Lanfang and Susheng, 2012) have used the data of period 1989 to 2003 and has identified two indicators for examining the relationship between economic growth and financial development in China. They concluded that the indicators for measuring the state intervention in financial development are negatively correlated with the economic growth of China. The indicators of market driven financing is positively correlated with the growth of the economy. Finally, Ayyagari, Demirguc-Kunt and Maksimovic (2008 cited in Zhang, Lanfang and Susheng, 2012) took the help of firm related data for examining relationship between growth of the firm and financing pattern of the firm, which can be informal versus formal finance. They explained that the formal financial system has encouraged the growth of the firms. Park and Sehrt (2001 cited in Zhang, Lanfang and Susheng, 2012) have identified that lending policy by the state banks have not fallen during 1991 to 1997 (Ljungwal and Li, 2007). Thus, it can be said that the financial development in China has created both positive and negative impact on the economic growth of China. 2. China’s financial development and economic growth China has experienced rapid growth in the economy after the reform in 1978. It has second largest economy in the world after United States and it can become the largest economy in the world in the coming 10 years on the basis of the Purchasing Power Parity (PPP) (Allen, J. Qian and M. Qian, 2005). China has always played a significant role in the development o ...Show more

Summary

Finance and Accounting 1. Introduction China’s economy has been experiencing rapid growth since 1978 and has been the most rapidly developing economy in the world. The growth started with the reforms in 1978 and the Chinese economy has been maintaining the annual growth rate of about 9.8% since then…
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