Work in Progress

This research explores why modern banks developed so late in China by focusing on changes in lending interest rates over a millennium. The results show that persistently high lending interest rates impeded borrowing activities, which in turn made banking less profitable and delayed the development of banks. This paper also challenges the Theory of Loanable Funds and the Liquidity Preference Theory by presenting historical evidence from China, which suggests that an increase in the money supply does not necessarily lower interest rates or stimulate economic growth.

Even though the first modern banks in China were established five hundred years later than those in the West, some modern banking practices existed as early as the Tang-Song period. Through a detailed analysis of Dunhuang Manuscripts, this paper demonstrates that Chinese Buddhist temples functioned as impersonal financial institutions, providing loans, making investments, and performing risk management like modern banks. However, this research also highlights that Chinese Buddhist temples could never evolve into modern banks due to longstanding conflicts with political interests.