Measuring financial sector efficiency in China: A study based on an enhanced neoclassical production function.

Area of Science:

• Economics
• Econometrics
• Financial Economics

Background:

• Assessing national financial sector efficiency is crucial for economic policy.
• Existing methods may not fully capture the link between financial and real economic sectors.
• General equilibrium theory provides a framework for understanding these interconnections.

Purpose of the Study:

• To develop a quantitative approach for assessing a nation's financial efficiency.
• To establish a robust link between the financial sector and the real economy.
• To analyze the trends and drivers of financial efficiency in China.

Main Methods:

• Improvement of the neoclassical production function to integrate financial sector impacts.
• Application of general equilibrium theory principles.
• Utilizing a two-stage semiparametric estimation for production function parameter determination.

Main Results:

• Financial efficiency in China showed an increasing trend, peaking in 2008, followed by a decline and resurgence.
• Pre-2015 financial efficiency closely tracked Total Factor Productivity (TFP) and GDP growth.
• Post-2015, financial efficiency trends diverged from TFP and GDP growth, indicating a significant shift.

Conclusions:

• The developed approach provides a new lens for evaluating financial efficiency.
• China's financial efficiency dynamics reveal distinct phases and a notable divergence in recent years.
• Empirical evidence supports the validity and insights derived from this methodology.