China and India are hard to ignore. Over the past 20 years they have risen as global economic powers, at a very fast pace. By 2012, China has become the second-largest world economy (based on nominal GDP) and India the tenth. Together, they account for about 36% of world population.
Their financial systems have also developed rapidly and have become much deeper according to several broad-based standard measures, although they still lag behind in many respects. For example, stock-market capitalisation increased from 4% and 22% of GDP in 1992 to 80% and 95% of GDP in 2010 in China and India respectively. By 2010, 2,063 and 4,987 firms were listed in China’s and India’s stock markets. Their financial systems have not only expanded, but also transitioned from a mostly bank-based model to one where capital markets have gained importance. Equity and bond markets in China (India) have expanded from an average of 11% and 57% of the financial system in 1990-1994 to an average of 53% and 65% in 2005-2010 in China and India.
But how much has this overall expansion in capital markets implied a more widespread use of those markets? Has it allowed different types of firms to obtain financing, invest, and grow? Do the cases of China and India show that the policies to promote capital-market development might be conducive to growth? If so, how inclusive is this growth? Is it associated with some convergence in firm size, with smaller firms benefitting the most? Or are China and India cases of growth without finance?
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