Trade openness, financial openness, and financial development in China

Abstract

This paper investigates the impact of trade and financial openness on financial development in China. We use three sets of indicators of financial development to distinguish size, efficiency and competition as aspects of financial development. The empirical results, using dynamic panel estimation techniques, suggest that both trade and financial openness are statistically significant determinants of financial efficiency and competition, but that openness has a negative impact on the size of financial development. Our results also suggest that the marginal effects of openness on financial efficiency and competition are positive for the most open provinces but negative for the least open regions, while the marginal effects of openness on the size of financial development are generally negative for most provinces in the sample. The results reflect a mismatch problem between the distribution in the types of trading companies and the distribution of financial resources, and also indicate that local incumbents may be strong impediments to financial development in China.