Skip to main content
SpringerLink
Log in

Insurance development, banking activities, and regional output: evidence from China

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

This paper applies panel cointegration tests and panel vector error correction models to investigate the interrelationship among the banking sector, insurance market, and regional output based on the samples from 25 Chinese provinces. We first find that there is a fairly strong long-run cointegrating relationship among real GDP, banking credit, and real insurance premiums. Second, both insurance markets (life and non-life) and the banking sector have a positive effect on real output. Third, we determine that banking activities and economic growth exhibit long-run and short-run bidirectional causalities. Fourth, there is fairly strong evidence in favor of the hypothesis for the long-run bidirectional causal relationships between insurance premiums and economic growth, taking into account the critical channel of the banking sector. Finally, we provide some beneficial suggestions for investors and policy-makers.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. In fact, there are many issues discussing the linkage between insurance markets and many economic activities. For example, Snow and Warren (1991) demonstrate that the unemployment insurance replacement ratio is related to future profits and previous wage incomes. Mukoyama (2013) deduces that unemployment insurance is beneficial for the poor rather than the rich. Bai and Wu (2014) find that insurance coverage can affect household consumption.

  2. Due to the restriction of the available data, we do not take into account other financial variables in the stock and bond markets.

  3. The limited sample and the relative magnitude of N and T should be a key issue when deciding on which techniques to use. According to Westerlund (2007), under Assumption 1 and the null hypothesis \({H}_{0}\), as \({T}\rightarrow \infty \) and then \({N}\rightarrow \infty \) sequentially, the method usually requires \({T}>{N}\). In this paper, we are limited by the data collection and \({T}< {N}\). But the T and N have little difference (\(T=21\) and \(N=25\)).

  4. This measure of financial development is more than simply a measure of the size of the financial sector. Banking credit isolates the credit issued to the private sector as opposed to the credit issued to governments, governmental agencies, and public enterprises (King and Levine 1993).

  5. The result is available upon request.

  6. To address this issue, we consider the Sargan test of over-identifying restrictions, which examines the overall validity of the instruments by analyzing the sample analog of the moment conditions used in the estimation process (Edison et al. 2002).

References

  • Ai HD, Xu MS, Guo K (2004) The empirical analysis of the relationship between economic growth and financial development. Res Financ Econ issues 7:26–32

    Google Scholar 

  • Allen F, Gale D (1997) Financial markets, intermediaries, and intertemporal smoothing. J Polit Econ 105:523–546

    Article  Google Scholar 

  • Arellano M, Bond SR (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

    Article  Google Scholar 

  • Arena M (2008) Does insurance market activity promote economic growth? A cross - country study for industrialized and developing countries. J risk Insur 75(4):921–946

    Article  Google Scholar 

  • Ba SS (1998) Transitional economic disequilibrium of regional financial structure and China’s financial operation. Reform Strateg 4:21–26

    Google Scholar 

  • Bai CE, Wu B (2014) Health insurance and consumption: Evidence from China’s new cooperative medical scheme. J Comp Econ 42(2):450–469

    Article  Google Scholar 

  • Bao JH (2013) The spatial econometric study of regional financial convergence. J Financ Dev Res 6:10–14

    Google Scholar 

  • Brainard L, Schwartz BL (2008) What is the role of insurance in economic development?. Zurich Financial Services, Zurich

    Google Scholar 

  • Breitung J (2000) The local power of some unit root tests for panel data. In: Baltagi B (ed) Nonstationary panels, panel cointegration, and dynamic panels, advances in econometrics, vol 15. Elsevier, Amsterdam, pp 161–178

  • Breusch TS, Pagan AR (1980) The Lagrange multiplier test and its applications to model specification in econometrics. Rev Econ Stud 47(1):239–253

    Article  Google Scholar 

  • Chen H (2006) Development of financial intermediation and economic growth: The Chinese experience. China Econ Rev 17(4):347–362

    Article  Google Scholar 

  • Chen PF, Lee CC, Lee CF (2012) How does the development of the life insurance affect economic growth? Some international evidence. J Int Dev 24:865–893

    Article  Google Scholar 

  • Didier T, Schmukler SL (2013) The financing and growth of firms in China and India: evidence from capital markets. J Int Money Financ 39:111–137

    Article  Google Scholar 

  • Edison H, Klein M, Ricci L, Sloek T (2002) Capital account liberalization and economic performance: survey and synthesis. International Monetary Fund, IMF mimeo, Washington

    Book  Google Scholar 

  • Engle RF, Granger GW (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55(2):251–276

    Article  Google Scholar 

  • Greenwood J, Smith BD (1997) Financial markets in development, and the development of financial markets. J Econ Dyn Control 21(1):145–181

    Article  Google Scholar 

  • Hadri K (2000) Testing for stationarity in heterogeneous panel data. Econ J 3(2):148–161

    Google Scholar 

  • Haiss P, Sümegi P (2008) The relationship between insurance and economic growth in Europe: a theoretical and empirical analysis. Empirica 35:405–431

    Article  Google Scholar 

  • Ho CY (2012) Market structure, welfare, and banking reform in China. J Comp Econ 40:291–313

    Article  Google Scholar 

  • Hu HB, Su M, Lee WH (2013) Insurance activity and economic growth nexus in 31 regions of China: bootstrap panel causality test. In: 2013 Global business, economics, and finance conference

  • Hu HB, Guo JL (2010) Test on the relationship between insurance development and economic growth in China. Macroecon Study 2:41–47

    Google Scholar 

  • Huo LH (1997) Extraction situation and development trend of Hainan insurance market. Hainan Finance 8:9–11

    Google Scholar 

  • Im KS, Pesaran MH, Shin Y (2003) Testing for unit roots in heterogeneous panels. J Econ 115:53–74

    Article  Google Scholar 

  • Impavido G, Musalem AR, Tressel T (2003) The impact of contractual savings institutions on securities markets. World Bank Policy research working paper no. 2498

  • Kao C, Chiang MH (2000) On the estimation and inference of a cointegrated regression in panel data. Adv Econ 15:179–222

    Google Scholar 

  • King RG, Levine R (1993) Finance and growth: Schumpeter might be right. Quart J Econ 108(3):717–737

    Article  Google Scholar 

  • Kugler M, Ofoghi R (2005) Does insurance promote economic growth? Evidence from the UK. Money Macro and Finance (MMF) Research Group Conference, vol 8

  • Lee CC (2013) Insurance and real output: the key role of banking activities. Macroecon Dyn 17:235–260

    Article  Google Scholar 

  • Lee CC, Lee CC, Chiu YB (2013a) The link between life insurance activities and economic growth: some new evidence. J Int Money Finance 32:405–427

    Article  Google Scholar 

  • Lee CC, Chen MP, Hsieh KM (2013b) Industry herding and market states: evidence from the Chinese stock market. Quant Finance 13(7):1091–1113

    Article  Google Scholar 

  • Lee CC, Huang WL, Yin CH (2013c) The dynamic interactions among the stock, bond and insurance markets. N Am JEcon Finance 26:28–52

    Article  Google Scholar 

  • Lee CC, Tsong CC, Lee JF (2014) Testing for the efficient market hypothesis in stock prices: international evidence from non-linear heterogeneous panels. Macroecon Dyn 18(4):943–958

    Article  Google Scholar 

  • Lee CC, Lin CW, Zeng JH (2016) Financial liberalization, insurance market, and the likelihood of financial crises. J Int Money Finance 62:25–51

    Article  Google Scholar 

  • Levin A, Lin CF, Chu CS (2002) Unit root tests in panel data: asymptotic and finite sample properties. J Econ 108:1–24

    Article  Google Scholar 

  • Levine R (2005) Finance and growth: theory and evidence. In: Aghion P, Durlauf S (eds) Handbook of economic growth, vol.1, no.1. Elsevier, Amsterdam

  • Lin YF, Jiang Y (2006) Economic structure, banking structure and economic development. Financ Res 1:7–22

    Google Scholar 

  • Long SB, Chen Z, Hu GL (2015) The nonlinear relationship between bank credit, stock market financing, FDI and Economic Growth in China. Shanghai Finance 1:29–37

    Google Scholar 

  • Lorent B (2010) The link between insurance and banking sectors: an international cross-section analysis of life insurance demand. CEB working paper 10-040

  • Ma J (2007) Guangdong Financial Development: The Process and Transverse Comparison. South China Finance 1:5–9

    Google Scholar 

  • Maddala GS, Wu S (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bull Econ Stat 61(4):631–652

    Article  Google Scholar 

  • Mckinnon RI (1973) Money and capital in economic development. Brookings Institution Press, Washington

    Google Scholar 

  • Mukoyama T (2013) Understanding the welfare effects of unemployment insurance policy in general equilibrium. J Macroecon 38:347–368

    Article  Google Scholar 

  • Outreville JF (1990) The economic significance of insurance markets in developing countries. J Risk Insur 57(3):487–498

    Article  Google Scholar 

  • Pan GC, Chang HL, Su CW (2012) Regional differences in development of life insurance markets in China. Emerg Mark Rev 13:548–558

    Article  Google Scholar 

  • Pan GC, Zhang YY, Wang BB (2012) Impacts of insurance industry development on economic growth in China–an empirical study with panel data from 30 provinces. Insur Stud 9:16–24

    Google Scholar 

  • Park A, Sehrt K (2001) Tests of financial intermediation and banking reform in China. J Comp Econ 29:608–644

    Article  Google Scholar 

  • Patrick H (1966) Financial development and economic growth in underdeveloped countries. Econ Dev Cult Change 14:174–189

    Article  Google Scholar 

  • Pesaran MH (2004) General diagnostic tests for cross section dependence in panels. Working paper No. 0435

  • Pesaran MH (2007) A simple panel unit root test in the presence of cross - section dependence. J Appl Econ 22(2):265–312

    Article  Google Scholar 

  • Pesaran MH, Yamagata T (2008) Testing slope homogeneity in large panels. J Econ 142(1):50–93

    Article  Google Scholar 

  • Shen Y (2000) China’s insurance market: Opportunity, competition and market trends. Geneva P on Risk Insur. Issues Pract 25(3):335–355

  • Shen CH, Lee CC (2006) Same financial development yet different economic growth–why? J Money Credit Bank 38(7):1907–1944

    Article  Google Scholar 

  • Shen KR, Zhang C (2004) Financial development and economic growth of China. Manag World 7:15–21

    Google Scholar 

  • Snow A, Warren RS Jr (1991) Unemployment insurance and the intertemporal substitution of consumption and labor supply. J Macroecon 13:713–724

    Article  Google Scholar 

  • Stiglitz JE (1985) Credit markets and the control of capital. J Money Credit Banking 17:133–1521

    Article  Google Scholar 

  • Wang H (2009) Insurance and bank credit risk management synergy mechanism. China’s Financ 23:50–52

    Google Scholar 

  • Ward D, Zurbruegg R (2000) Does insurance promote economic growth? Evidence from OECD countries. J Risk Insur 67:489–506

    Article  Google Scholar 

  • Westerlund J (2007) Testing for error correction in panel data*. Oxford Bull Econ Stat 69(6):709–748

    Article  Google Scholar 

  • Westerlund J (2008) Panel cointegration tests of the fisher effect. J Appl Econ 23:193–233

    Article  Google Scholar 

  • Westerlund J, Costantini M (2009) Panel cointegration and the neutrality of money. Empir Econ 36:1–26

    Article  Google Scholar 

  • Westerlund J, Edgerton D (2007) A panel bootstrap cointegration test. Econ Lett 97:185–190

    Article  Google Scholar 

  • Westerlund J, Edgerton D (2008) A simple test for cointegration in dependent panels with structural breaks. Oxford Bull Econ Stat 70:665–704

    Article  Google Scholar 

  • Wu S, Cao ZY, Qin K, Lang W, Zhang R (2012) Empirical analysis of the operating efficiency of China’s insurance industry. J Contemp Res Bus 8:12–28

    Google Scholar 

  • Wu H, Zhao GQ (2010) Insurance development, financial synergy and economic growth-based on the provincial panel data. Econ Sci 3:61–72

    Google Scholar 

  • Xu X, Mo JW (2013) The impact of disaster relief on economic growth: evidence from China. Geneva Pap Risk Insur 38:495–520

    Article  Google Scholar 

  • Zeng Z, Yao P, Yang G (2014) Analysis of insurance market’s nonlinear effect on economic growth in China. Insur Stud 12:14–23

    Google Scholar 

  • Zhang J, Wang LF, Wang SS (2012) Financial development and economic growth: recent evidence from China. J Compar Econ 40:393–412

    Article  Google Scholar 

  • Zheng W, Liu YD, Dickinson G (2008) The Chinese Insurance market: estimating its long-term growth and size. Geneva Pap Risk Insur 33:489–506

    Article  Google Scholar 

  • Zhao SM, Li Y, Pang YF (2009) Theory model and empirical test on the contribution of insurance to economic growth. Insur Stud 1:51–56

    Google Scholar 

  • Zhou AL (2008) A study on the actualities of insurance market, problems and counter measures in Ningxia. J Second Northwest Univ Natl 3:79–84

    Google Scholar 

Download references

Acknowledgments

The authors are grateful to the Editor, Associate Editor, and the two anonymous referees for helpful comments and suggestions.

Author information

Authors and Affiliations

  1. Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan

    Chien-Chiang Lee

  2. School of Economics and Management, Beijing Jiaotong University, No. 3 Shangyuancun, Haidian District, Beijing, 100044, People’s Republic of China

    Tie-Ying Liu

Authors
  1. Chien-Chiang Lee
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Tie-Ying Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Tie-Ying Liu.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Lee, CC., Liu, TY. Insurance development, banking activities, and regional output: evidence from China. Empir Econ 53, 1059–1081 (2017). https://doi.org/10.1007/s00181-016-1154-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-016-1154-9

Keywords

JEL Classifications

Search

Navigation