| Abstract: |
The paper explores a coherent perspective for understanding the multifaceted
puzzle of China’s financial development. Specifically, it tests competing
finance-growth nexus hypotheses using Granger causality tests in a VECM
framework for China over the period 1980–2002. The empirical results support a
complex set of bidirectional causality between the financial development
proxies and economic growth variable. Additionally, bidirectional causality
shows the Chinese financial system to be more driven by and closely aligned
with real sector activities than exposed to speculative finance. Study
findings have several policy implications. Notably, the development of
financial institutions should not be emphasized unilaterally. Rather,
attention should be given to the complementary and coordinated development of
financial reforms and changes in other areas. |