The fact that there exists a positive, causal relationship between the functioning of financial systems and the rate of economic development has been rigorously established in the development economics literature. However, in the literature examining China's rapid economic development over the past two decades, the topic of financial reform has received only limited attention. Of the research that has emerged, the standard view holds that China's financial sector has remained essentially unreformed, and as such, has represented a drain on economic development. These conclusions, however, are contentious because numerous deficiencies in the standard view can be identified, including the lack of a robust theoretical foundation, an often-dubious methodology and an apparent incongruity with observed facts such as rapid financial deepening and economic growth.
This dissertation first examines the nature and extent of financial reform in China during the reform period. In contrast to the standard view, an analysis of the empirical evidence leads to the conclusion that the financial sector has undergone substantial reform, which has been characterized by vast institutional diversification, a relaxation of government controls over financial resources and a trend towards managing financial institutions through the use of indirect controls similar to those found in developed, market economies. An econometric analysis also establishes a link between financial reform and the financial deepening that has taken place.
The impact of financial reform on economic development is then investigated by considering the economic performance of state-owned enterprises, the major borrowers from the financial system, and various financial institutions and markets such as state banks, non-bank financial institutions, stock markets and external players. On the whole, the empirical evidence suggests that financial reform has positively impacted upon China's economic development, primarily by contributing to the mobilization of savings and through the allocation of those savings to relatively productive investments.
It is, therefore, suggested that the Chinese approach to financial reform holds considerable merit and offers important policy implications for other developing, transitional economies. It is also concluded that while the Chinese approach to financial reform has been largely successful in the past, a variety of new internal and external pressures now mean that the process of financial reform must be expedited if this positive impact is to continue into the long-run.