Abstract
China’s economy faces the daunting challenge of shifting from a manufacturing-based economy to a service-based economy. Reforms in the services sector are slated to continue to take place in the coming years, including in the financial sector. In this paper, we explore China’s success and challenges with structural change and then take a closer look at the financial services sector to find out where reforms have occurred, where the potential lies, and what the future will bring. We first describe structural change with regard to growth and TFP (total factor productivity), then as it applies to China. We examine China’s financial services sector. Next, we calculate potential GDP of the financial services sector now and with the implementation of expected reforms. We find that, given even conservative estimates, the value added of the financial intermediation sector could double, as labor, capital, technology, and elasticity respond to liberalization policies. Whether potential GDP under reforms is reached is another question; therefore, we recommend that China both increase the pace of implementation, focusing in particular on reducing the oligopoly in the banking sector, increasing investment options by reforming its bond and equity markets, and enhancing innovation in the financial sphere while controlling for risk.
Highlights
China’s economy faces the daunting challenge of shifting from a manufacturing-based economy to a service-based economy
There is little written about the potential impacts of opening up China’s financial sector on GDP and potential GDP, yet it is critical to understand the role that China’s massive targeted structural change will have upon growth and other factors
Using figures from 2011, we find that TFP is 1.0345 if the capital stock is proportionately used, 1.563 if half the proportional capital stock is used, and 2.3767 if one quarter the proportional capital stock is used
Summary
China’s economy faces the daunting challenge of shifting from a manufacturing-based economy to a service-based economy. We explore China’s success and challenges with structural change, take a closer look at the financial services sector to find out where reforms have occurred, where the potential lies, and what the future will bring. There is little written about the potential impacts of opening up China’s financial sector on GDP and potential GDP, yet it is critical to understand the role that China’s massive targeted structural change will have upon growth and other factors. This paper seeks to fill the gap in the literature on the economic impact China’s financial service sector reforms can have. While China has been successful in transforming from an agricultural-based economy to a manufacturing-based economy, it is unclear to what extent China will be successful in
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