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

Article excerpt

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.

Key Words: Regional Financial System, Bank Locations, Institutional Reform, China, Henan.


Financial geography has long focused on global and national issues, such as globalization, international or national financial centers, and national financial systems (Porteous, 1995; Leyshon and Thrift, 1997; Martin, 1999a; Clark, 2005). Theoretical and empirical work on geographical studies of sub-national financial systems is limited. The few exceptions in sub-national studies draw exclusively on evidence from the developed economies, either focusing on the metropolitan areas (Polese and Shearmur, 2004; Marshall, 2004; Zhao et al., 2004), the regional inequality of financial services (Klagge and Martin, 2005; Martin et al., 2005), or the financial practice relevant to the local economy (Lee, 1999; Tickell, 2000). Yet the relevant issues in the less developed economies, particularly in the less developed regions in these nations, remain one of the least explored aspects in financial geography.

Based on evidence from the developed economies, many researchers have observed the increasing institutional and geographical concentration of the financial system (e.g., Martin, 1999a; Klagge and Martin, 2005), although differences still exist among nations (Carnevali, 1996; Tickell, 2000). Some scholars have developed a "stages of banking development" theory to illustrate the spatial evolution of the financial system (Chick, 1986; Dow, 1999). Starting from local and regional banking, this evolution is moving towards centralization in global centers (Martin, 1999b). Underlying these stages, the trends of development are both geographical expansion of some individual banks and concentration of banking services in some localities. This may be true from the perspective of historical evolution in a market economy. But the situation may differ in some special contexts. For example, due to the special roles played by state regulations, banking development in the transitional economy may not closely follow the tendencies identified.

China is a transitional economy which has experienced rapid institutional changes in its banking system since economic reforms commenced in 1978. In the traditional planned economy, financial operation and management were highly centralized. One state-owned bank, the People's Bank of China (PBC), controlled money supply, and managed all banking and savings activities. More importantly, PBC had a planning function, serving as the accounting agency for the whole planned economy. Thus, the bank branches at various levels corresponded and adhered to the hierarchies of government administration. Since 1978, and especially since the early 1990s, market-oriented reforms of state-owned banks (SOBs) have taken place in China. …