Financial Reforms, Capital Investment and Financial Intermediation in China

Abstract

China has witnessed remarkable changes in its capital investment and financial system since initiating economic and financial sector reforms more than three decades ago. However, there is a dearth of studies examining what impact these reforms have had on financial intermediation, measured by credit growth, in the country. This article addresses this vacuum and investigates the effect of financial sector and capital investment reforms on credit growth in China between 1986 and 2016. We examine how real interest rate (the financial reform indicator) and gross fixed capital formation (the economic capital investment indicator) are linked with financial intermediation in China. Our empirical results suggest that although gross fixed capital formation positively influences credit growth, there is no evidence that real interest rates influence credit growth in China. The main message is that credit has grown in China, not because of financial intermediation but because of the increased need to finance growing fixed capital investment. JEL Classification: E43, E44, F65