Tests of Financial Intermediation and Banking Reform in China

We develop tests of financial intermediation by national banking systems based on the expectation that, in commercial systems, financial intermediation should not be overly influenced by policy variables; should be greater in richer, faster growing industrial areas; and should direct funds to the best projects regardless of where deposits originate. Using Chinese provincial data from 1991 to 1997, we test whether financial reforms in the mid-1990s increased efficient intermediation by different financial institutions. We find that the importance of policy lending by state banks did not fall during the recent period and that lending by financial institutions did not respond to economic fundamentals. J. Comp. Econ., December 2001, 29(4), pp. 608–644. University of Michigan, Ann Arbor, Michigan 48109; and Department of Government, Dartmouth College, Hanover, New Hampshire 03755. © 2001 Elsevier ScienceJournal of Economic Literature Classification Numbers: G21, O16, O53, P34.