Tuesday, January 30, 2007

China Myth?

Arnold Kling up at Econlog has cited an article in Milken Institute Review regarding the weakness of China's economic system (actually the article also touches on India's financial system but I do not think I know enough about India's system to comment on it).

According to the study:

"China’s financial system makes poor use of its captive pool of savings. Partially or wholly state-owned companies absorb 73 percent of bank loans, even though their average productivity is just half that of private companies. The private sector now produces more than half of China’s GDP, but get just 27 percent of the bank credit."

Two observations:

1) Loans that are granted to state-owned enterprises (SOE) are not necessarily used by the SOEs themselves. Often these loans are re-lent to private sector enterprises. Hence, using loans granted to SOEs as a proxy of the degree of state-dominance in the area of credit overstates the importance of state borrowers.

2) Many alternative financing arrangements have emerged in China in recent years to meet the financial needs of private-sector firms. Some of these informal financial institutions are documented in Kellee Tsai's excellent Back Alley Banking. Again just looking at the numbers on loans granted to SOE by banks overstates the important of state borrowers as people in China with money to save are no longer limited to park their funds with formal financial institutions which are mainly state-owned.

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