Local Government Intervention And Banking Industry Development:Internal Logic And Empirical Evidence

Economic decentralization and political promotion incentive constitute the intrinsic motivation of economic development of local government, making the role of local government is more like a business operator instead of the provider of public services. At the same time, because of long-term financial depression in credit fund price is undervalued, so the local government in the process of "competition" for growth is very interested in grabbing financial resources from the banking system. The tax-sharing fiscal system reform has weakens the fiscal capacity of local government, which enhances the motivation of the local government to intervene the banking industry even more. Through various administrative means, especially the manipulation of the local financial institutions, local governments have achieved the goal. In the background that the financial sector development is critical to long-term economic growth, while China’s financial sector is dominated by the banking sector, it has important theoretical and political meaning to discuss the economic effects caused by local government intervention in the banking sector. Based on the systematic review of the relevant literature, this paper discusses the internal logic of local government intervention in the banking sector and proposed two empirical hypotheses. Hypothesis one believes that local government intervention clustering bank credit funds to the region accelerates the process of money creation and rise regional inflation levels. Hypothesis two thinks that local government intervention promotes the development of local financial institutions and enhances the efficiency of the banking intermediation, however, due to the local government’s intervention, the role of enhancing efficiency is limited.Based on the results of the theoretical analysis, this paper finally did the empirical analysis with the data of Chinese provincial panel data from1998to2011.The empirical results showed that, on the macroeconomic level, local government’s intervention in the banking industry will do a significant effect on inflation,on the banking intermediary efficiency meso level, although the local government promoted the development of local financial institutions, but the local government’s intervention diluted the role that the development of local financial institutions to enhance the efficiency of bank intermediary obviously.