Research On The Impact Of The Characteristic Of Financial System On The Structure Of External Assets:

Along with the advancement of global financial integration, China is rapidly integrated into the process, which is reflected in the fact that both external total assets and net assets have increased rapidly in a short span of twenty years. Nevertheless, the integration of China into the world economy exhibits several distinct features from other countries. In terms of the total asset structure, for example, the high-yield equity and FDI assets consist of a fairly small fraction whereas the proportion of those assets in the form of debt and foreign reserve is pretty high. Given the net asset structure, it is still the case that the proportion of equity and FDI assets is very low and negative while that of the debt and reserve asset is positive and fairly high.Recent literature has extensively documented that the financial development level is a key factor that accounts for the recent imbalance in the external assets. However, this study found no evidence in support of this viewpoint. Accordingly, the heterogeneity of financial system which was widely ignored in the existing literature has a better explanatory power. Specifically, within a country with higher intention to adopt a market-oriented financial system, the configuration of its external assets would be mainly accounted for by the high-yield FDI and equity assets, while the country with bank-oriented financial system mainly in low-yield debt assets. This finding is also true for the net assets structure. Based on the above typical facts, this study tends to explore the reasons of external asset structure imbalance from the perspective of the financial system heterogeneity, which would provide the insight for the adjustment of China’s external assets structure imbalances.Firstly, with the method of the financial history, this study endeavors to sum up the basic and general rule of the national financial system based on a series of typical facts during the evloving process of the representative countries’ financial systems. Secondly, it further explores the potential factors in determining the formation and evolution of the countries’financial system via international analysis. The results shows that the formation of a country’s financial system is decisively influenced not only by non-economic factors such as legal system and institution, but also by a series of economic factors such as economic development, industrial structure, trade openness, financial openness. Nevertheless, during the evolving process of a country’s financial system, the impacts of economic development level, financial openness and the legal system are substantially pronounced while those of other factors are insignificant.Finally, this study provides a deep-depth influencing mechanism analysis of the financial system on a country’s external total assets and net assets. It can be explained from the following aspects:First, in terms of risk diversification, investors in market-oriented financial system mainly adapt the lateral dispersion risk-sharing approach while the investors in bank-oriented financial system mainly use intertemporal risk-sharing approach via financial intermediaries. Different risk diversification approaches determine to what extent the dispersion ability of the heterogeneous risk, which in turn leads to differences in the configuration of external assets for investors. Second, countries with market-oriented financial system have developed financial markets, which can provide more diversified portfolio products and more sophisticated risk coping mechanism, while the country with a bank-oriented system can only offer less portfolio products and sustain an incomplete risk coping mechanism. This directly leads to a differentiated risk appetite for investors in different financial systems. Specifically, the investors in the market-oriented financial system are inclined to have a higher risk appetite than those in bank-oriented financial system. Third, different financial systems countries are linked to different legal system. Market-oriented financial system widely used a flexible rule and regulation, and the bank-oriented financial system countries adopt a fixed laws and regulations with. In response to various conflicts in recent financial markets, market-oriented financial system obtains a comparative advantage to protect investors’ rights compared to bank-oriented financial system. Accordingly, differences in the ability of heterogeneous risk diversification, investors’risk appetite and the degree of protection of investors’ rights for different financial systems, to some extent determines its own distinct characteristics in the external asset allocation.From the above, the country’s financial system has a significant impact on its external asset’s structure. It has been a long time that China was dominated by a bank-oriented financial system, which in turn indicates a possibility that the imbalance of external asset structure could be partially resolved through the financial system. However, it should be caution that radical financial system reform is not merely a remedy to current problems, but could also bring damage to a country’s economic development. Hence, the reform of a country’s financial system should abide by certain laws.In sum, in order to cope with the issue of external asset structure imbalance, it should be considered from the following aspects:First, abide by the associated rule pertinent to the formation and evolution of the financial system to conduct a gradual reform in Chinese counterpart by ensuring a sound and smooth running of the current system; Second, gradually speed up the pace of the capital account openness along with the process of China’s marketization and further provide a more diverse asset allocation of external assets; Third, advance the development of multi-level capital market and gradually increase local residents’ risk tolerance with overseas investment.