Banking on the Confucian Clan: Why China Developed Financial Markets So Late

Over the past millennium, China has relied on the Confucian clan to achieve interpersonal <br> cooperation, focusing on kinship and neglecting the development of impersonal institutions <br> needed for external finance. In this paper, we test the hypothesis that the Confucian clan and <br> financial markets are competing substitutes. Using the large cross-regional variation in the <br> adoption of modern banks, we find that regions with historically stronger Confucian clans <br> established significantly fewer modern banks in the four decades following the founding of <br> China’s first modern bank in 1897. Our evidence also shows that the clan continues to limit <br> China’s financial development today.