REGIONAL FINANCE AND REGIONAL DISPARITIES IN CHINA

China's growth has recently been spectacularly high but there have been expressions of concern about its uneven regional distribution. It has been asserted that this has been partly due to national financial institutions (mainly state-owned banks) redirecting deposits from poor to rich regions and that this will be improved by smaller regionally-focussed institutions. We test these propositions using both informal analysis and more formal econometrics employing recent panel time-series methods. We find that (i) there is no evidence that deposits are siphoned off from the poor provinces for loans in rich provinces; (ii) financial disparities are positively related to output disparities, (iii) the link is stronger for rural credit co-operatives than for state-owned banks and (iv) the relationship is causal in both the long and short runs.