Tang, Jian-Jing
(2016)
Interest rates and financial market integration: a long-run perspective on China.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis takes interest rates as the topic of interest, and studies financial market integration in China.
Paper I studies structural determinants and temporal coefficients of interest rates scattered over 6th -20th century China. Detailed findings concern intrinsic loan features (such as maturity and creditor type, among others) and how they affected the interest rate level. Overall, interest rates decreased in the markets under study, with fluctuations corresponding with dynastic cycles, up-and-down. The two interest rate troughs are
found around the 9th -11th century of the Song dynasty and the 19th century of the late Qing period. Significant events of political economy (wars and recovery, international relations and trade, etc.) significantly affected interest rates, but mostly through temporary shocks; economic development and its ensuing financial advancement (in institution, innovation, markets, etc.) tended to show qualitative and long-run impact on financial markets and interest rates.
Part II estimates financial integration regarding 14th-20th century China.
Firstly estimated is pair-wise integration based on time-series data in 18th-20th century China. Before 1840, distance was the major (but not the only) determinant of financial integration. The maximum range of financial integration at the time was up to 1,400 kilometres, which was slightly farther than that of commodity (grain) integration and confirms the macro-region theory of Skinner in that there was little cross-regional market interplay. However, the overall integration performance for the period before 1840 was limited, with large gaps between distance groups regarding both interest divergence and adjustment speed. A national financial market did not seem to emerge until the 19th century, when both local and cross-regional capital markets became more homogeneous
(with converging interest rate gaps and synchronising arbitrage speed). However, the final wars (the 2nd anti-Japanese war and the 2nd civil war in China) before the People’s Republic of China (PRC) stopped this integration process.
Secondly, overall integration among 23 provincial markets scattered over 57 years in the Ming and Qing period may be explained by three factors: education, population, and the relative position of the local market to all other markets. The spatial autoregressive coefficients were negative, suggesting that a local provincial market was negatively related to all other markets. Education and population represent the influence of innovation and commerce on overall integration respectively. They are positively associated with interest rate gaps, hence negatively connected to integration. However, such negative relationships might denote financial development in local markets, which lowered local interest rates and temporarily enlarged the interest rate gaps. Neither arable land nor warfare involvement was significant in explaining overall financial integration.
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