The Financial Economic Journal article; Law, finance, and economic growth in China by Allen and Qian (2005)

 

Reflective Essay on Law, Finance, and Economic Growth in China

Article Summary

The Financial Economic Journal article; Law, finance, and economic growth in China by Allen and Qian (2005), critically and creatively evaluates through comparisons and inferences on China’ alternative institutional arrangement, governing systems, law, and formal financial system. It also assesses the relationship between China’s economic growth and other countries’ financial development systems such as the Stock Market. Contemporary studies cited on China’s legal and fiscal systems establishments indicate signs of underdevelopment despite the rapid economic growth compared to other countries (Liang & Teng, 2006). For instance, the Chinese private sector grow is less inclusive equated to other Listed and State sector thereby demanding transformation to eliminate deficiencies. Comparatively, the Chinese State and listed sectors indicate successful development based on alternative mechanisms employed to build institutional relationships and reputation for other economies. Consequently, exposure of the key factors connecting the Chinese formal systems, financial, law, and economic growth lead to an understanding of how the nonstandard mechanisms impacts on promoting optimal growth and development for China and other countries (Allen, Qian & Qian, 2005).

Broadly, the article employs scholarly evidence to explore China’s legal, financial and growth sectors visualizing the Status of Chinese economic based on GPD and growth to contrast the issue against the emerging economies rather than the developed ones. Allen, Qian, and Qian, explore the Chinese firms’ financial sources based on aggregated evidence as well as cross-country evidence on annual growth rates, Purchase Power Parity, and population density. They also access evidence on both Listed and Private Sector to demonstrate different types of the corporate governance, stocks, ownership structures, financing, valuation, and dividends. Survey and anecdotal evidence, for example, were used by the author to provide background information on the successful regions evaluated as a justification of the findings and results obtained.

Agreeing with the Article Argument

Analyses on the authors’ argument in the article indicate delivery of facts, figures, and substantiation from an informed and expert position, which make it worth agreeing with the authors’ arguments. The article covers the visualization of China’ as an alternative institutional arrangement with different governing systems, law, and formal financial system. These areas form China’s economic growth and relate well with its development targets and agenda. They are also factual through the use of figures and numbers and can be measured scientifically, socially and politically given the current chine’s position as an emerging economy and as an influence in the world economy.

The second reason for agreeing with the article is a result of the examinations provided in the three major economic sectors that include the state and government controlled companies and enterprises, the publicly traded and exchange sector called listed and the private sector, which is under private ownership. In reviewing the imbalance of the three sectors, and the support for private sector, the article is keen on using measures that include banking systems’ domination and the ongoing privatization process. It samples more than 1000 firms, listed and traded on the Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) with an indication of concentrated equity on State for firms converted from the State Sector and founder families for the private firms (Allen, Qian & Qian, 2005).

As demonstrated from the research by Liang and Teng (2006), the status of the Chinese economy, which is also the position of the article, make it among the most impactful in the world. The country’s growth domestic Product (GDP) in 2002 stood at U.S $1,237 ahead of Canada and Spain but now is at $11,391.620 only behind the United States (China GDP, 1960-2016). The feat is remarkable given that China’s rapid growth only started in 1979. Other comparisons in the article indicate the same effect of fast Chinese growth. On the legal system, China classifies as an English-origin, which is true given the protection offered to investments and the upholding of creditor and shareholder rights. These attributes, also proclaimed by Liang and Teng, (2006) contribute to strengthening the financial system allowing venture in various finance and capital markets and line with the country’s equity versus the population. The mitigation measures outlined in the article such as the formation of the state-owned asset management companies assigned to cash recovery on the bad loans and improving loan structures. Based on an outright reliability of the authors’ point of view the findings and results, I find them accurate and reliable to generalize or use for future studies. One way for this is the referencing from credible sources such as financial, law and politic journals, empirical perspectives, case studies and renowned authors among others further justifying the article’s standpoint. For instance, the authors employ both survey and anecdotal evidence to obtain the background information about the most successful regions or sectors in China.

Evaluating the authors’ argument persuasiveness based on the consistency of point made for the authors’ key inferences and assumptions. The general assumption made by the authors while exploring the topic of research is that the economic status, legal systems and financial system of a country affect the overall economic growth and development. The brief description of the authors’ variables and sources, strong inferences and conclusion serves as the best tool and build up in building the authors’ arguments. For this reason, I concur with the authors’ arguments on the topic of study about China’s financial, legal and economic growth

Reflection on the Economic and Financial

in China 

Statistically, an economic and financial study of China’s financial, law, institutions and economic growth in shows that China serves as a counter example in analyzing weak financial and legal systems despite fastest growing economies

Liang & Teng, 2006). The economic and financial phenomenon as learned in previous literature tends to support market-based systems where openness and the role of the state play an important part in the country’s financial system development. From a deregulation and financial liberalization point of view, relational, financial systems are regarded as a better approach for long-term Chinese economic development compared to a market-based system (Bruton & Ahlstrom, 2003). In this regard, the Chinese economic growths evolve as the financial systems progress with the financial globalization changes and the alterations of the Chinese power relationships (Bruton & Ahlstrom, 2003).Also, the economic politics affects financial systems directly.

The economic and financial systems constitute financial institutions and market arrangements that channel the country’s savings for corporate governance and productive uses. Though, as asserted by (Lee, 2015), the positive correlation between economic and financial development result to better monitoring and allocation of financial resources where financial systems are either categorized as bank-based or market-based. Therefore, similar financial market development and banks influence on the economic outcome. Chinese lower economic performance compared to the developed economies is as a result of inadequate financial and legal systems based on its inefficiency market-based system (Lee, 2015). This is an indication of a high moral hazard that exposes the government policies to economic fragility and financial crisis.

While no financial system is complete, each of the Chinese market and bank-based financial systems has its benefits and disadvantagesMarket-based financial systems are considered stronger and better compared to bank market systems as they can generate adequate data about different firms’ performance as well as reflecting on all the fundamentals requirements in a real financial sector (Lee, 2015). The components of the stock market are use essential in the effective financial motoring process as they can visualize market stock prices and potential bad economic performances (Bruton & Ahlstrom, 2003). Therefore, maximizing the stock market values by firms has a positive implication of improving the economic growth and performance. However, financial market success gives a better reason for corporate groups to allocate resources to their affiliate firms. This reason, China uses bank loans and self-fundraising commercial channels as financial channels to finance Chinese companies consequently determining the stock market bottom line through price speculations that lead to high transaction costs (Lee, 2015). Evaluation of the Chinese bank-based systems benefits and their particular limitations demonstrate that the existing financial debts help in solving cash flow misreporting as it exerts economic disciplinary effect.

Alternative governance and financial mechanism serve as a turning point in supporting the growth and development of the Chinese private sector through reputation and relationship that enable firms to overcome asymmetric data problems that inhibit contract enforcement and coalitions. Cultural and religious factors also play a significant role in investors’ protection, institutional development and legal origin in venturing capital industry growth and development(Bruton & Ahlstrom, 2003).  To add to these factors, the Chinese economic situation has high social trusts that serve as an alternative mechanism for the development of substantial financial incentives to increase economic participation. Product and input market competitions work successfully in the country by creating a relatively strong comparative advantage for organization thriving and survival. Moreover, the existence of low entry barriers promotes high levels of market competitions allowing companies to grow and develop economically.

The financial, legal, and economic environment control and ownership separation protect shareholders in countries with dominant ownership structures such as China. At the same time, input suppliers cooperation by forming market compliances and coalitions ensures the optimal outcome of financing and legal systems (Bruton n& Ahlstrom, 2003). However, profit sharing among the firms enables firms’ growth, reputations, and contractual agreement. As a transitional economy, China and its firms have to adjust both their financial and legal systems to strengthen their economic growth and development. The result will be a diversified commercial work for the transitional economy that is likely to work regardless of the socialistic Adopt drastic economic reforms such the Chinese economy may not work due to the Confucius’s influence that essential changes in society should be gradual and fully implemented only after they prove correct, thus reinforcing the existing financial and legal systems

Through analyzing different governance systems and their economic support, much can be learned from the Chinese Communist Party based on its autocratic nature, but with the ability to support and promote financial and legal systems for economic growth especially for Private Sector. The government plays a significant role in financial, legal and economic growth reform process especially for transitional and socialist economies (Liang & Teng, 2006). As socialist governments experience limited support for economic grow progression, much can be observed from democratic economies and richer countries in supporting financial and legal systems(Liang & Teng, 2006). For instance, the government officials play a vital role in implementing alternative governing mechanisms and institutional arrangements for the development of financial and legal systems and should be consulted for efficient implementation of an alternative mechanism for economic development. They also help incorporate the three pillars of financial and legal system constructions entailing information systems, legal environment, and market support system. The Chinese legal environment allows normal market operations as information systems address asymmetric constructs based on information credibility and authoritativeness (Bruton &Ahlstrom, 2003). Finally, market support systems allow investors in alternative mechanisms to improve their experiences and expertise.

Suggestions for Future Reforms Economic Financial Phenomenon in China 

The future financial and economic reforms should be directed towards the liberalization of financial and economic matters as globalization takes effect in many countries. Future studies need to encourage China’s successful Private Sector transformation to better alternative methods in the state deficiency and listed sectors As suggested by Lee (2015), it is imperative that future explorations on financial opening, liberalization and globalization conducted to visualize proficient financial adjustments that include changes in financial systems, handling a crisis, and alterations in the legal functions. It is equally important to implement better legislative policies that strengthen the pillars of financial and juridical systems construction such as education, information systems, money control, the legal environment, and support market systems. As a populous nation, there is a need to have reforms in areas including social welfare, housing, insurance, employment policies and the state-owned enterprises, which affect the financial system. These will be achieved through initiating favorable determinant areas that include taxation, foreign investment policy, exit policy, power to make decisions, and decentralization thereby ensuring credibility and disclosure of vital information connect economic growth, finance, and legal systems. It is expected that the reforms will be pragmatic due to the obvious basis of experimentation of rather than the use of ideology in China, but adopting a more rapid and privatized system that leases operation of the state-owned assets (Lee, 2015). Consequently, the move will promote efficiency for the enterprises and allow or encourage the development of other non-state and foreign sectors that highly account for china’s economic growth.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Allen, F., Qian, J., & Qian, M. (2005). Law, finance, and economic growth in China. Journal of financial economics, 77(1), 57-116

Bruton, G. D., & Ahlstrom, D. (2003). An institutional view of China’s venture capital industry: Explaining the differences between China and the West. Journal of Business Venturing, 18(2), 233-259

Lee, K. (2015). Firm Size and Economic Growth in China. Journal of International and Area Studies, 22(1), 93-112. Retrieved October 27, 2016, from http://www.jstor.org/stable/10.2307/43490282?ref=search-gateway:02e1467df7209097e69d2cd074664c2f

Liang, Q., & Teng, J. (2006). Financial development and economic growth: Evidence from China. China Economic Review, 17(4), 395-411. doi:10.1016/j.chieco.2005.09.003

 

 

 

 

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