Title:
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The relationship between banking development and economic growth in China
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A synthesis of the extant literature suggests that financial development is of
central importance in facilitating economic growth (Patrick, 1966; Goldsmith,
1969; McKinnon, 1973; Shaw, 1973; Pagano, 1993; King and Levine, 1993a;
Hellmann, Murdock and Stiglitz, 1995; Struthers, 2010). This thesis focuses on
the relationship between banking development, with respect to both financial
deepening and financial widening, and economic growth in China, using the
banking and economic system as a major case study. The research first
intruduces financial widening into China, links financial widening with financial
deepening and economic growth in an edogeneous framework in China, and
develops an analytical framework that can be used for further research. In total
two frameworks, two models and two mechanisms are adopted.
The thesis adopts theoretical analysis, descriptive statistical analysis and
econometric methodologies, and chooses Pagano (1993) as the basic theoretical
model to expand. The results of the descriptive statistical analysis yields data are
concordant with the extant literature, confirming that financial deepening and
financial widening are significant to economic growth. 1993-2010 quarterly data
from China is analysed by employing the econometric techniques, the empirical
model and five hypotheses are tested. The Engle-Granger 2-step cointegration
test shows that the alternative hypotheses 1 and 3 are upheld, and the Granger
causality test indicates that the results uphold the alternative hypotheses 2, 4 and
5. The research recommends that the formulation of effective policies to
strengthen interest rate liberalization and financial innovation, thus promoting
financial deepening, hence growth. The research also suggests that government
could give priority to supporting financial widening in policy, promoting
efficiency of capital allocation, thus promoting economic growth.
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