Bank fund reallocation and economic growth: Evidence from China

This paper examines bank fund reallocation and regional economic growth based on 1991–2005 provincial-level data of four state-owned commercial banks of China that practice fund reallocation nation-wide. We find no correlation between bank fund reallocation and regional economic growth or between bank loans and regional economic growth. We find, however, a positive association between bank deposits and growth. It appears economic growth leads financial development in China, not the other way around. Furthermore, as China’s market-oriented reforms deepen, fund reallocation and loans start to manifest positive effects on growth even though the banks are government owned.