China: one country, many banking systems

China is a political unity, but when it comes to financial system, it is deeply fragmented.

Genevieve Boyreau-Debray (World Bank) and Shang-Jin Wei (IMF) find that the level of financial integration (or segregation) across Chinese provinces is similar to that across OECD countries. The level of integration actually decreased over 1990s. To make things worse, the government tends to reallocate capital from more productive regions towards less productive ones.

Pitfalls of a State-Dominated Financial System: The Case of China 
Abstract:      
This Paper examines pitfalls of a state-dominated financial system in the context of China. These include possible segmentation of the internal capital market due to local government interference and misallocation of capital. First, we employ two standard tools from the international finance literature to analyze financial integration across Chinese provinces. Both tests confirm a similar (and somewhat surprising) picture: Capital mobility within China is low! Furthermore, the degree of internal financial integration appears to have decreased, rather than increased, in the 1990s relative to the preceding period. Second, we document that the government tends to reallocate capital from more productive regions towards less productive ones. In this sense, a smaller role of the government in the financial sector might increase economic efficiency and the rate of economic growth.