Financial Development and Economic Growth: Evidence from China

The overall development of an economy is a major factor that has significant impacts on the development of the economy's financial markets. Since well-functioning financial systems offer good and easily accessible information, they lower the costs of transaction. This in turn enhances resource allocation and strengthens economic growth. The financial services industry consists of various systems such as stock markets and banking systems that enhance growth and help in poverty reduction. However, commercial banks tend to dominate the financial system during low levels of economic development while stock markets become more active and effective during periods of high levels of economic development ("Financial Sector", n.d.). The other important systems in the financial services industry include sound macroeconomic policies, shareholder protection, and good legal systems.

Financialization can be shown in three perspectives. Firstly, financialization implicates finance regains dominant power in capitalism. Secondly, autonomy of financial institutions increases because of the increase in financial interests. Thirdly, wide range of economic actors is integrated into financial markets due to financial innovation and expansion of financial sector (Palley, 2007).

Even though, the future prospects for the economic growth of China are negative but the rapid growth of the People's Republic of China, in economic terms, since the reforms of 1978 is undeniable. Chinese economy has an average Gross Domestic Product (GDP) of 9.37 per year. In addition to that, China has also become one of the major contributors in the world economy and has shown tremendous growth even in the times of recession as well. (Holz 2005)

An efficient economy is an economy where resources are allocated to serve every citizen in the best way so that there will be minimal waste and inefficiency within the economy. China is the short name for the country, but the real name is People’s Republic of China. China happens to be one of the economies that falls under an efficient economy because it has continued to improve other the past decades. “Over the past five years, economic freedom in China has improved by less than 1.0 point, continuing its patchy and uneven progress since 1995” (heritage.org). Although China has had some rough stages in economy efficiency, they have continued to strive and make it on top. China is one of the most thriving countries in the world today, but it is still classified as a developing country. The population has reached over 1.364 billion and contributes to the 19.06 trillion dollars in exports along with the 19.01 trillion dollars in imports. China has obtained over fifty different commercial banks in their growth to the present, but there are twenty-nine different banks present in their economy. The currency used is the Chinese Yuan and one U.S. dollar equals 6.4 Yuan’s.

In the 1990’s both Korea and Taiwan had embarked the process of financial liberalization and maintained the momentum up

Department of Finance, University of Nebraska-Lincoln, Lincoln, NE 68588-0490, USA b Department of Economics, Wichita State University, USA Received 1 November 2003; accepted 1 December 2003 Available online 20 April 2004

Reports by Fry (1997) suggests that measuring financial distortions with black market exchange premiums rates and real interest rates squared lowers investment ratios eventually leading to a reduction in growth output. In the same vein, Roubini and Sala-i-Martin (1992) also revealed that financial repression is negatively related to growth while controlling other growth determinants; hence interest rates (bank-reserve requirements) correlates inversely with growth.

As cited in Mohammad Mahmudul Alam, Ologunde, Elumilade, and Asaolu (2006) mentioned that a country will prosper in long run, only if its stock market in a better financial position.

Department of Accounting, Graduate School of Business, Stanford University, Stanford, CA 94305, USA Received 2 March 2002; received in revised form 14 January 2003; accepted 27 January 2003

Yan Ailing1, Jiang Hong2 School of Business Administration, Zhejiang Gongshang University, Hangzhou, China. E-mail: alyan@foxmail.com. 2 Institute of Policy and Management, Chinese Academy of Science, Beijing, China.

It is possible to miss valuable information about macroeconomics and financial stability if policymakers continue to choose to ignore the behavior of credit aggregates. However, it is unclear from this study how this information is included in the overall policymaking and regulatory framework, and via which financial instruments. In terms of policymaking and research, it is safe to assert that credit aggregates contain valuable information about the likelihood of future financial crises. However, It is not proven to be a perfect predictor, and this is emphasized by the fact that, in some periods, especially in eras of financial expansion, development and innovation, credit expands to support real economic growth. It is important to keep in mind that at the same time, historical records show that the recurrent occurrence of financial instability and fragility have more often than not been the result of credit booms gone bad.

A safe financial system is central to the development and successful market economy, and an essential condition for growth and stability of the economy as a whole. This system is the basis for mobilizing and distributing savings and facilitates its daily operations. Therefore, it is extremely important to create a sound financial system. After creation of a well established financial system, money and capital markets can develop especially primary and secondary markets of national government securities. The financial system has a significant impact on GDP growth and its main part - the national income on development of enterprises and sectors of the economy, and financial situation of the general population.

Over the past 27 years, former communist countries in Central and Eastern Europe (CEE) have experienced a comprehensive financial transformation to help them reintegrate into the global economic market. The transformation with the purpose of improving economic development involved labor market, enterprises restructure, governance, policy, privatization and the most important one: financial system.

Financial development boosts economic growth have been shown by the increasing number of scholars, however whether the financial sector development could benefits the income distribution is still controversial. Under this question, this essay try to use statistically method to explore the relationship between income inequality and financial sector development.

Financial economies: - several little businesses realize it laborious to get finance and once to get finance is commonly quite high. This can be as a result of little businesses that have developed an honest data. Massive corporations thus realize it easier to seek out potential loaner and to boost cash at lower interest rates.