Using city-level data from China, we find that the overall size of finance does not affect the extent of resource misallocation. However, when finance is decomposed into different parts, we find that local government-driven finance backed by the revenues from land sales exacerbates the misallocation problem, while the remaining part of finance, which is more likely market-driven, significantly improves allocative efficiency. We use the instrumental variable approach to establish causality. Further evidence shows that local government-driven finance lowers allocative efficiency by facilitating the allocation of resources to the low-productivity state sector, but non-local government-driven finance reduces the extent of such distortions. Our analyses suggest that identifying the sources of financial assets and, more broadly, distinguishing between good finance and bad finance are critical to develop a socially desirable financial system.

Marshalling a large and novel dataset of cell towers and using the purchase of Yu’E Bao as a proxy for Chinese households’ investment in money market funds, this paper investigates how broadband infrastructure affects the welfare of households in wealth management. We find that with the improvement in broadband infrastructure, Internet service becomes more available to households and they tend to convert bank deposits with suppressed rates of interest into money market funds that provide less regulated and hence higher rates of return. Further analyses show that the effect of broadband infrastructure on the conversion of bank deposits into money market funds is more pronounced in counties with lower density of bank branches and among less educated people. Our empirical findings suggest that by alleviating the policy distortions imposed on the traditional banking sector, online financial products and service are powerful tools in the promotion of financial inclusion.