Finance And Poverty Reduction In China: An Empirical Investigation

Abstract

In this paper, the causal relationship between financial development and poverty reduction is examined in China, using the newly developed ARDL-Bounds testing procedure. The paper uses two proxies of financial development against private per capita consumption - a proxy for poverty reduction to examine this linkage. The results of the study show that the causal relationship between financial development and poverty reduction is sensitive to the proxy used to measure the level of financial development.When the domestic credit to the private sector (DCP/GDP) is used as a proxy for financial development, a bidirectional causality is found to prevail between financial development and poverty reduction in the short run. However, when the broad money supply ratio (M2/GDP) is used as a proxy, a bidirectional causality between financial development and poverty reduction is found to prevail in the short run, but a unidirectional causal flow from poverty reduction to financial development is found to predominate in the long run. These results show that the poverty-reduction programmes, which have been ongoing in China for decades, are likely to lead to further development of the financial sector in the long run.