Building Market Institutions PDF Download

This dissertation studies the development of the banking system in China, the world's largest. Specifically, it examines why and how the banking market has become diverse and competitive, and the economic consequences of this process. The case is puzzling and important for political science because contrary to the existing literature, none of the formal institutions commonly associated with financial development—those that credibly constrain state power—is present. I argue that what happened in China is an outcome not of financial liberalization but of state engineering. In lieu of full-fledged market opening, Beijing mobilized and incentivized its local state agents to enter the banking market as competitors. While the new local state banks (LSBs) are distinct profit-maximizing players, their organizational structure and institutional missions are modeled explicitly after those owned by the central state. I call this model of banking market development "organizational spinoff." Through this approach, the Chinese state has managed to capture gains from a more competitive albeit internal market while maintaining political monopoly over it. In essence, organizational spinoff has enabled the state to avoid the conventional commitment game with private financiers, which would have required tying its own hands to entice market entry while risking losing financial control. This dissertation makes several contributions to the study of political economy and Chinese politics. Substantively, it contributes to our understanding of market development in autocracies. Analytically, it highlights the limits of modeling autocracies as unitary actors and shows the utility of an organizational approach. Methodologically, it introduces spatial and experimental methods to the study of the political economy of finance. Finally, it is the first to systematically trace the evolution of China's banking system, the complexity of which has thus far been masked by the simple term "state-owned, " thereby shedding new light on policy making and central--local politics in reform China.