The Effect of Financial Institutions on Economic Growth in China

The relationship amid financial institutions and the economic development in China has for long dominated financial and development debates.  Some claims  have recently been made that financial institutions only impacts the economy as anticipated, it is clear that financial institutions structures and development  plays a crucial role in regard to economic development.  China is currently amongst the most significant developing nations globally in terms of its general contributions (Weber, 2016).  While financial institutions are established to be the greatest promoters of economic development in most states for china the case is distinct.  China, in particular, suffers from virtual weak financial as well as legal systems (Allen, Qian, & Qian 2007). The sustainability of the economic development of china as well as the stability of its financial system, therefore, does not only matter for its own sake but also for the global economy. The financial system in the state has been involved in continuous reforms since the late 20th century with the objective of increasing efficiency as well as the allocation of economic capital (Allen, Qian, & Qian 2007). However, the control approach that is used in governing financial institutions affects the country economy by slowing development.

The legal system and the formal banking industries in china can be described to be weak and thus they are unable to implement effective governance which leads to the lack of a connection between finance, development, and law (Weber, 2016).  The economic growth of the state is mainly supported by the informal financing industry which incorporates both the institutions and feeds.  China’s financial institutions are, however, characterized by less inefficiency as compared to other state’s banks but holds less economic development impact based on the poor governance (Weber, 2016). The financial system in china is highly dominated by banking as the nation mostly controls a high number of the banking institutions.  This, therefore, shows the lack of liberalization by the financial institutions.  Liberalization is crucial as it results in a higher rate of growth generally.  With the recognition of a more improved financial system in the country’s economic resources allocation, a number of financial reforms have been implemented by the government recently.  The financial markets have advanced lately but there is still the high presence of crucial gaps that requires a solution which lies certainly on liquid debt markets (Weber, 2016).

The governance of the financial institutions in china exposes the economic development to several risks.  The first risk is associated with the liberalization capital reform and the potential capital outflow rush (Allen, Qian, & Qian 2007).  This risk mainly destabilizes the general financial system’s operation thus affecting the economy.  The policy that governance the financial institutions places the financing system at  high difficulties thus transforming the economy to be more oriented on market rather  that being a command driven one. Financial capital flow should gain its freedom in the state as a part of reform. The county’s strategy towards the liberalization of capital account has permitted it to sustain a certain control degree over the movement of capital.  This approach particularly benefits the government alone by permitting it to retain its authority which generates tensions in regard to the high movement of capital. China’s financial system reduces the flow of capital into economic activates since operations are governed and directed by the state’s government (Allen, Qian, Qian, & Zhao, 2008). This, therefore, necessitates the private sector to fund most of the investments which are inadequate due to the high population of the state.

The present financial system in china is highly subjugated by an outsized banking sector that is characterized by low success. Decreasing the levels of loans that are not based on performance from the primary banks to attaining a normal status is a crucial necessity for a short period financial system modification (Allen, Qian, Qian, & Zhao, 2008).  In addition, the limitation of the stock industry in economic resources distribution has led to inefficiency thus slowing economic growth. Financial markets are slowly developing and this hinders the ability of the economy to grow since its potential is not exploited fully.  The financial system in the state is less successful because it is based on a standardized industry.  This industry, therefore, has no presence of governance methods, institutions and financing modes alternatives.  The financial sector is supposed to work in collaboration with financial banks as well as markets which will, in turn, support growth (Barth, Koepp, & Zhou, 2004).

The financial system in china is characterized by the crisis which is highly present in the stock market, real estate industry, banking industry as well as in the currency market. Over the previous year, the GDP development in china has slowed in a significant level (Barth, Koepp, & Zhou, 2004). The products prices have fallen and the different economic indicators have thus been damaged which incorporates the industrial productivity growth, imports as well as high reserves.  The present economic GDP, however, shows that the economic performance is stable based on the serving and the production sector’s performance (Barth, Koepp, & Zhou, 2004). Capital control is an approach that is adequately rooted in regard to the state’s financial system.  Despite the recent loosening of some controlled level, the control mechanism still affects the operation of most of the financial institutions. China is well established and recognized for its contributions globally (Barth, Koepp, & Zhou, 2004). However, its domestic economic growth is influenced by the banking institutions which are highly strained by-laws. Institutions crises’ are mainly influenced by the flow of capital.

Despite the fact that in the recent there has been notable economic freedom, its output is affected by the lack of high financial system’s degree (Heffernan, & Fu, 2005).  Most of the measured output has been contributed by the private sector which enjoys more freedom from strict governance. In comparison to the public financial industry, the private’s industry financial production has been increasing continuously in the previous decades. With the recent development of global trade, china’s economy has been experiencing high development. However, the state’s banking sector is being globalized slowly as the government still retains a high control regime of the economic sector.  There is a low efficiency that is associated with the financial institutions that are owned by the state while more progress can be traced from institutions that are owned by foreigners (Heffernan, & Fu, 2005).  Financial institutions control the economy in a significant way as economic growth relies on the flow of capital.  The economic development in china is slow since the private sector is responsible for the primary part of the development with little assistance from the public financial sector.  These, therefore, demonstrate that the state-owned institutions necessitate a high level of reforms to improve the performance of financial institutions with positive economic effects (Heffernan, & Fu, 2005).

The financial system in china exists in two different natures which are a public element that is directed by the government and a competitive market-based element.  This implies that the government directs most of the financial systems operations which impact productivity (Huang, 2008).  Institutes require liberation in order to be competitive and adopt a modernized strategy that will ease the development need. Governance freedom creates a favorable environment for business which increases production, performance and creates more jobs.  Currently, china has a high rate of unemployed persons because of the low economic production (Huang, 2008).  This, therefore, implies that economic stability is far from being achieved as the government as well as the financial institutions make fewer investments. The financial system in china permits less capital flow into the economy which leads to low business investment.  With the low business generation, this implies that the economy is weakened by decreased productivity (Huang, 2008).

In summary, due to the rapid financial system reforms, china is experiencing several economic challenges which slow its development. With the low economic growth, production has decreased thus affecting the employment rate. This implies that the revenue that is generated from its taxes is not the best currently.  The financial system of the country needs a transformation in order to support the need for a rapid development of the economy. Financial institutions are highly responsible towards economic growth but with the presence of operation freedom. The movement of capital should be liberalized to allow more financing of economic activities. High economic development requires a high flow of resources into the business world which impacts performance and well as revenue production positively.

 

 

 

 

 

 

 

 

 

            References

Allen F., Qian J., & Qian M. (2007).  China’s Financial System:  Past, Present  And Future. Retrieved from https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=978485

Allen, F., Qian, J., Qian, M., & Zhao, M. (2008). Review of China's Financial System and Initiatives for the Future. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1185877

Barth, James R., Koepp, R., & Zhou, Z. (2004). Banking Reform in China: Catalyzing the Nation's Financial Future. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=548405

Heffernan, S., & Fu, M. (2005). China: The Effects of Bank Reform on Structure and Performance. Retrieved from https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=903347

Huang, Y. (2008). Just How Capitalist is China? Retrieved from https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=1118019

Weber, O. (2016). The Sustainability Performance of Chinese Banks: Institutional Impact. Retrieved from https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2752439