Theoretical And Empirical Analysis Of China's Financial Development And Economic Growth Relationship

This paper theoretically and empirically analyzes the relationship and causalitybetween financial development and economic growth in China. Based upon therelated theories that has been established, we investigate the Chinese evidence and digthe channels and mechanisms that financial development possibly affects economicgrowth. We build many models to explain the above channels and mechanisms, usingthe main advanced economical research methods such as gross production function,differential, numerical simulation, Hamilton function, and Bellman equation. Then weget and propose some hypotheses or propositions that need tested, which provide thefoundations for empirical analysis. We accumulate the related data of twenty-nineprovinces, autonomic regions, and municipalities directly under the centralgovernment-Xizang and Chongqing is excluded-of Chinese mainland from 1978 to2004, and then tests the theoretical hypotheses or propositions proposed by buildingpanel data econometric model or time series econometric model.This paper makes sure the following results:1. In the long-run, financial development of China is supply-leading. That is tosay, financial development is able to induce economic growth via effectivelyallocating money, enhancing capital accumulation and technological level. In theshort-run, financial development of China is demand-following. That is to say, growthinduces an expansion of the financial system. As the real side of the economydevelops, its demands for various new financial services materialize.2. Although the Chinese bank system extends mainly credits to state-ownedenterprises, there are two channels that transfer them to private-owned enterprises.The first is via the legal restructuring of ownership in Chinese state-owned enterprises.The second is via the illegal leak of the bank loans to the private sector. Theseindirectly increase the efficiency that the bank system allocates loans, and thenenhance the marginal productivity of capital and boost the economic growth. In theearly period of 1980's, when the outer finance of the state-owned enterprises waschanged from the treasury department to the bank system, the debt-asset ratio wasincreasing rapidly. The heavy burden that the state-owned enterprises must repay thebank loans forces the restructuring of ownership. In order to protecting the safety ofthe bank credit assets, the government would have to push the reformation of thestate-owned enterprises. 3. Public bond investment benefits to the economic growth, such as it cansubstitute tax, improve social infrastructure, enhance consumption, keep macroeconomical stability, and adjust income gap and economic structure. Financialdevelopment provides the foundation for the publishing and exchanging of the publicbond, and finances the projects with the public debt investment, so indirectly booststhe economic growth.4. Domestic financial environment is crucial to the FDI inflows. Financialdevelopment can help home country get more benefits from FDI, so indirectly boostthe economic growth. First, joint venture is the most important form of the FDIinflows, while domestic financial sector can extend credit for home companies toestablish joint venture with foreign companies. Second, financial sector providesfinance services to the foreign-owned companies. Third, domestic financial sectorplays an important role in transforming the potential FDI spillover effects to the realproductivity.5. Financial development is beneficial to the accumulation of physical capital inthe short-run, but no beneficial in the long-run. When the external financialdevelopment level is higher than or equal to the ratio of debt-asset that firm wishes totake on, financial development won't induce the firm investment which is onlydetermined by the desired debt-asset ratio of the firm itself. Only when the externalfinancial development is lower than the ratio of debt-asset that firm wishes to take on,financial development will boost the firm investment. So financial developmentpromotes the firm investment in the short-run, but don't in the long-run.6. Dual-economy transformation is refer to the relative increase of the proportionof modern sector such as manufacture industry and services industry in GDP, whilethe relative decrease of the proportion of traditional sector. Dual-technology gap anddual-investment gap-productivity and capital scale in modern sector are larger thanthose of traditional sector-are the impetuses of the transformation of the dual-economy.Channeling scare resources from savers to investors, evaluating and screening highprofit rate projects, and decreasing risk, the financial development is more beneficialto the technological progress and capital accumulation in modern sector than intradition sector, and then accelerates the transformation of dual-economy.In conclusion, Finance plays a key role in the development of social economy. Itis crucial to the long term economic growth to build the good functional financialsystem and guarantee the stable development of financial industry. Yet it does not mean that the simple policy of liberalization to encourage the financial developmentwill gain good performance of economy. In fact, it is finance the bedrock of socialeconomy, financial efficiency determined by the efficiency of the other sectors thatfinancial system reformation should be put off until the reformation of the othersectors, and be coordinated with them.