Measuring Financial Efficiency in China

This paper develops a comprehensive and standardized framework for quantitatively assessing the financial efficiency of a nation. We establish a crucial link between the financial sector and the real sector, indirectly unveiling insights into financial efficiency through the allocation structure of marginal capital output. We use a two-stage semiparametric estimation method to eliminate the endogeneity of the production function in the calculation of financial efficiency. The values of financial efficiency for China spanning the years 1997 to 2018 exhibit a distinct pattern of initially increasing, followed by a decline, and subsequent resurgence, culminating in the highest recorded value in 2008. Prior to 2015, the financial efficiency closely mirrored the trajectories of total factor productivity (TFP) and GDP growth rate. However, post-2015, we observe a discernible deviation in the trend of financial efficiency from these two economic indicators. These results can be verified by external empirical facts and evidence.