Institutional Reforms and Spatial Evolution of the Banking System in Henan, China Since 1978

Abstract

Recent rapid institutional reforms in the financial sector and fast economic growth

make China a special case for studying the spatial evolution of banking system in the particular circumstances. Drawing on data from China's four big state-owned banks in the nation's largest less-developed, yet rapidly growing interior province of Henan, this paper reveals that the spatial evolution of the regional banking system did not follow the "stages of banking development" theory developed in the literature. The regional banking system started from a fairly even spread of national bank branches and moved towards a geographical concentration in the urban centers. Institutional reforms, particularly government deregulation and bank re-organization played a crucial role in driving the changes. Along with diminishing government controls, spatial economic difference directly determined the locations of bank branches. This was proved at high significance levels in the pooled OLS and Fixed Effect regression models. The questionnaire interviews with 58 bank branches further supported the findings. We argue that the different banking practices in the specific institutional background of China may extend the "stages of banking development" theory based on evidence from the Western economies.