Abstract:

This article studies the relationship between decentralization, reforms of financial institutions and financial development in China from 1978 to 2006. We take the decentralization reform as one of the most important institutional arrangements in China's economic transition. We find that in such a background without market system as China, decentralization decomposed the traditional planning system, helped build up a new market–oriented system, which has not only brought out sustained high economic growth, but also promoted financial development. We set up a model of decentralized financial development on the basis of Van Wijinbergen's original model (1983b), and implemented empirical analysis to test the correlation between decentralization, economic growth and financial development. We conclude that China’s financial development is a special process which took place synchronously with decentralization reform as a process of the institutional change and with economic growth in an environment of the financial repression which has been practiced to a moderate degree. So China's special experiences of transition and development cannot be introduced to other transitional and developing countries.

Keywords: decentralization, financial reform, financial development