Among the most notable developments in the global economy over the past 20 years has been the rise of China and India as world economic powers. Along with high overall growth in these economies has come an increase in their financial activity. But how much have different types of firms used capital markets and benefited from their expansion?
In a new study and VoxEU column, we argue that the expansion of financing to the private sector in China and India has been much more subdued than the aggregate measures of financial depth suggest. Although capital raising activity in equity and bond markets expanded substantially in 2005–10, it remained small as a percentage of GDP. Importantly, this expansion was not associated with widespread use of capital markets by firms. Not only have few firms made recurrent use of equity and bond markets; even fewer firms have captured the bulk of the capital market financing. Moreover, firms that use equity or bond markets are very different from—and behave differently than—those that do not do so. While non-issuing firms in both China and India grew at about the same rate as the overall economy, issuing firms grew twice as fast in 2004–11.