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