Convergence Of Regional Financial Development: Theory And Empirical Analysis

As a large developing country, China's regional disparity in financial development becomes larger and larger, which influences economic and social development in coordination. Based on the theory of the interaction between financial development with economic growth, and the theory of convergence, the paper discuses the existence and mechanism of convergence in regional financial development, and carries out the empirical test by using the data of Guangdong, Hong Kong and Macau, in order to provide reference for other regions to put forward financial strategy.Firstly, the paper constructs a regional economic growth model including the financial sector, by introducing the variable of financial development into neoclassical growth model. By using the model, the paper reveals the relationship between regional economic growth and financial development, and explains the existence and mechanism of convergence in regional financial development from the theoretical point of view. The results show that the speed of regional financial development is direct proportion with that of regional economic growth before the economy reaches steady state. And the speed of regional financial development is equal to that of regional economic growth when the economy reaches steady state. In long term, the speed of financial development in backward areas will be higher than that of developed areas. That is, the regional financial development will take place a process of convergence.Secondly, the paper explores the mechanism of regional capital flows, financial innovation diffusion and institutional innovation in financial development's convergence, based on the theory of mechanism of convergence in economic growth. The mechanism of capital flows is that capital flows from developed areas to backward areas under the law of diminishing marginal returns of capital, promoting the convergence of the regional financial development. The mechanism of financial innovation diffusion is that the financial innovation diffusing from developed areas to backward areas, which improves the financial efficiency of backward areas and promotes the convergence of regional financial development. The mechanism of institutional innovation is that institutional innovation accelerates the speed of financial development in backward areas by optimizing the allocation of financial resources and lowering transaction costs, thus causing the convergence of regional financial development.Again, by using the data of Guangdong, Hong Kong and Macau, this paper empirically analyzes the existence of convergence in regional financial development based on the theoretical analysis. The results show that the region of Guangdong, Hong Kong and Macau has significant convergence in regional financial development.1979-2009, the coefficient of variation of per capita total loans in Guangdong, Hong Kong and Macau shows a downward trend, which means a process ofσconvergence has taken place in this region.1979-2009, the region of Guangdong, Hong Kong and Macau showsβconvergence in regional financial development, and the trend is more significant during the period 1997-2009. 1979-2009, a process of club convergence has taken place in the regions of Greater Pearl River Delta, the East and West wings and the Mountain.Further, the paper empirically analyzes the mechanism of convergence in regional financial development by using the data of Guangdong, Hong Kong and Macau. The results show that Capital flows is important mechanism of financial development's convergence in Guangdong, Hong Kong and Macau.1986-2009, the net inflow of capital from Hong Kong to Guangdong is lager, the more significantly a convergence of regional financial development shows in the region of Guangdong, Hong Kong and Macau. The innovation diffusion is another mechanism of financial development in the region of Guangdong, Hong Kong and Macau.1985-2009, the financial innovation diffusing from Hong Kong to Guangdong, decreases the gap of financial efficiency among Guangdong, Hong Kong and Macau. And the reduction of the financial efficiency's gap causesσconvergence of financial development in the region of Guangdong, Hong Kong and Macau. As an important institutional innovation, the implementation of CEPA and its Supplemental Agreements promotes the convergence of financial development in the region of Guangdong, Hong Kong and Macau. The results of empirical study show that the implementation of CEPA and its Supplemental Agreements helps decrease the coefficient of variation of per capita total loans in Guangdong, Hong Kong and Macau during the period of 1979-2009.Finally, based on the prerequisites of mechanism of regional financial convergence, the paper puts forward the recommendations of stimulating convergence of regional financial development and causing regional financial development in coordination, including promoting capital flows within the region, guiding the diffusion of financial innovation, and accelerating institutional innovation.