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Using panel data for 29 provinces in China during 1990-2004, the present paper attemptsto explore a possible link between financial development and China’s foreign trade. Threemeasures of comparative advantage in manufactured goods have been applied in our study,including Balassa’s revealed comparative advantage, the net manufactured export index,and the Michaely index. We also use four indicators of financial development to identify thedifferent functions of regional financial development, and to determine both size and efficiencyfeatures of financial institutions. The estimation results suggest that besides factor endowments,foreign firms and infrastructure, financial development has a quantitatively large and robusteffect on China’s manufactured goods trade. Therefore, further reform of China’s financialsystem should be encouraged to fully exploit the comparative advantage of China’s foreigntrade.
Using panel data for 29 provinces in China during 1990-2004, the present paper attempt explore a possible link between financial development and China’s foreign trade. Three measures of comparative advantage in manufactured goods have been applied in our study, including Balassa’s revealed comparative advantage, the net manufactured export index, and the Michaely index. We also use four indicators of financial development to identify the different functions of regional financial development, and to determine both size and efficiency features of financial institutions. The estimation results suggest outside factors endowments, foreign firms and infrastructure, financial development has a quantitatively large and robusteffect on China’s manufactured goods trade. Therefore, further reform of China’s financialsystem should be encouraged to fully exploit the comparative advantage of China’s foreigntrade.