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Menna Bizuneh


After the major system failure in 2008, policy makers have started to question about whether the western financial system is still an optimal choice. Continuing financial liberalization or restricting foreign banks from entering are two choices for the developing world to consider. Thus, it is important to know whether China’s 2006 policy, which liberalizes China’s banking sector, has had a positive impact on its economic growth. The theories and empirical findings in the current literature provide an ambiguous answer to the economic impact of foreign banks’ presence. As such, this paper evaluates China’s 2006 policy on economic growth by using the OLS regression model with quarterly time series data from 1998 to 2011.

The main finding of this study is that there is a positive economic gain under the policy of financial liberalization. In fact, when the policy is in effect, one percentage-point increase in foreign banks’ asset share in China will increase GDP by 3.78 percentage, supporting a recommendation for emerging countries like China to further open up their financial sector.

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