China's Financial Development And Comparative Advantage: From The Perspective Of External Finance

Financial development and international trade are the two important factors effecting economical growth and their relationship has gradually drawn attentions from the theoretical and empirical studies. Analyzing the source of comparative advantages through the aspect of financial development is an important direction in this new study field.Based on different theoretical frameworks and the approaches of study, many economists have fully and profoundly discussed China's comparative advantages of foreign trade. However, the study on China's comparative advantages from the aspect of financial development is inadequate.The purpose of this paper is to theoretically illustrate and explain the mechanism that the financial development acts on comparative advantages from the angel of external finance means, through which financial system correlates with enterprises. After that, on the ground of the unique characteristics of China's financial development and external finance, the paper provides a new interpretation for the form and shift of the comparative advantages of China's foreign trade, and discusses how to promote the development of China's foreign trade healthily through financial development.Model-based theoretical analysis shows that the mechanism in which financial development affects the comparative advantages through external finance mainly exists in the following aspects:encouraging savings and facilitating transformation from savings to investment to improve the amount of external finance in the economy and eliminate the obstacles hindering the exercise of comparative advantages; elevating financial development to reduce the costs of external finance and promote the achievement of the comparative advantages; and solving the problems of asymmetrical information and agent problems to provide the external finance to the efficient enterprises or good projects, and enforcing the effective supervision on the enterprises and projects to form comparative advantages in the concerned fields and industries.In the process of financial development, any improvement in the financial functions would help alleviating the constraint to the sectors needing external finance; especially those industries depending highly on external finance can benefit more from it. If the level of financial development of one country is higher than others, the sectors with external finance will have more comparative advantages, which leads to the expansion of the volumes in the foreign trade and changes in the structure of export goods of that country.In the course of China's financial development, financial mobilization and financial leakage to the non-state-owned economy promote the exercise of the comparative advantage. State-owned economy, strategic industries and departments have been supported by external finance, which promoted the form of new comparative advantages; on the other hand, resulted in the inefficient use of the finance. The non-state-owned economy's constraint to external finance inhibits changing of comparative advantage. The indirect finance system in which state owned banks prevail does not benefit the development of the medium and small enterprises and high-tech enterprises.From the angle of the industries'dependence on external finance, the empirical research on the relationship between financial development and changes of comparative advantages in China suggests:financial development serves as an important cause of comparative advantages, but the financial development differentiates in the extent of influence on industries because of the different dependence on the external finance; those sectors rely highly on the external finance can benefit more from the improvement and development of financial functions in the process of financial development.From the point of view of the industries'dependence on external finance, the paper studies the effects of financial development on China's export goods structure by selecting the relative data of 28 industries in manufacture sectors from 2001 to 2006. The results suggest that the magnification of financial intermediaries and the optimization of financial structure promote the upgrading of China's export goods structure in recent years. But the efficiency of financial system has less relation with China's export goods structure.According to the theoretical analysis and empirical research, the main direction of China's future financial reform and development lies in the following aspects: insisting on the financial reform and promoting the financial development to realize the improvement of financial functions; under the conditions of maintaining the reasonable scale of financial system and continuously optimizing its structure, placing more emphasis on improvement of efficiency of financial system, through financial development, to make all the sectors and enterprises get strong financial supports, especially those capital and technology compacted industries with high dependence on external finance, and fulfill the shift of comparative advantages and optimization of export goods structure in the future.