Finance Development, Capital Formation And Economic Growth

Since reform and opening-up, high investment, high saving and high capital formation have become the major engine of china's sustainable and speedy economic growth. However, in the long term China's economic growth depends on a massive investment which has caused many pending problems, such as extensive economy, low investment efficiency and low capital formation. According to development economics, economic growth mainly depends on capital stock, marginal social productivity and allocative efficiency of resources. During the development process of a country's economy, capital formation plays a very important role which are largely influenced by the saving scale and the transformation efficiency of saving to investment. All of these factors are determined by the financial system. The paper has conducted theoretical analysis and empirical research on the relationships among China's financial development, capital formation and economic growth. According to theoretical analysis, the research have deeply studied the influential channel and mechanism of each other which is on the basis of China's practical situation. On the other hand, the paper has employed the data from 1978 to 2009 to do empirical research which has used fixed-effect model, SYS-GMM for dynamic panel data, and VECR. In term of empirical study, the findings of the paper are as follows:In the first place, based on Malmquist index of DEA model, the research has stated:The total factor productivity (TFP) index in China has an average annual increase 1.9% from 1978 to 2009, the technology efficiency index and technological progress index increase 0.2% and 1.7% individually. Moreover, the pure technology efficiency and scale efficiency index have an annual increase 0.3% and-0.1%. Importantly, the annual contribution rate of China's total factor productivity to economic growth rate is about 19.2%. But technological progress and TFP have a low contribution to China's economic growth. These results have expressed that China's economic growth are mainly depended on the factor inputs. Accordingly, the annual growth rate of TFP in China's east, middle and west are 3.1%,1.6% and 2.8%. In the second place, based on the deeply research on the influential mechanism between financial development and income gap between urban and rural residents in china, the paper finds that the persist extend of income gap between urban and rural residents is a main factor to cause China's high saving model. The situation of China's income gap fits for income hypothesis of Kuznets. That means, China's financial development is not useful to reduce income gap between urban and rural residents, and it is also for the income gap in different regions. Furthermore, larger gap between urban and rural financial development scale and its efficiency, larger income gap between urban and rural residents.In the third place, the paper has studied the main transformation mechanism between China's saving and investment. Since reform and opening-up, the transformation level of China's saving and investment is not high, and the regional capital flows is rather less. Compared to other regions, capital flows of China's east is more stronger than those of the middle and the west. That states the level of China's financial development is not high, and it has a weak influence to the transformation rate between saving and investment. Moreover, there is a long term stable relation between China's saving rate and investment rate, and both of which have a notable dynamic orient mechanism in the short term.In the fourth place, the paper has analyzed the action mechanism of China's banking structure and capital formation. It states that there is a marked negative relation between China's regional banking structure and economic growth, which also shows high concentration ration of banking is not useful for China's economic growth, maybe it is caused by the dominant position and the ownership of China's state-owned bank. Among this, the concentration of banking in the east has a large negative effect to the economic growth, the middle takes second place, and the west is the last. There is a long term stable relation between China's banking structure and fixed capital formation. Among the regions, there is a negative short term influence between the two factors in the east, but both the middle and the west have positive effects. In the fifth place, according to the study on the capital formation effects of financial development to FDI from 1985 to 2008, we have found China's FDI has a notable crowing-out effect. That means one unit increase of FDI to GDP will stimulate 1.24 unit increase of total social investment in fixed assets. However, from 1985 to 1991 there is crowing-out effect between FDI to capital formation, from 1992 to 2008 there is crowing-in effect between the two factors. The associated effect between financial development and FDI also reduces FDI capital formation effect of the three regions. These findings maybe caused by the low level of China's financial development and imperfect financial system.In the sixth place, since reform and opening-up, China's financial development is useful for the capital formation as a whole. However, the over intervention of Central bank and the discrimination to the loan of non-stated owned sector have caused negative influence to the capital formation. From 1978 to 2009 there is uncertain effect between China's financial development to capital allocation efficiency. Before 1994 this effect is negative, however, from 2005 to 2009 this effect has obvious facilitation. Among this, there is a positive effect between financial development to capital allocation in the east, and an uncertain effect exists in the middle, but a negative effect appears in the west. Based on the findings, it states that the financial development has a notable relation with marketization degree.Lastly, there is a positive effect between the scale of China's financial development to TFP, but a negative effect exists between the ratio of non-stated owned loan to TFP. Although financial development has a rather promotion effect to China's TFP, it is not obvious, especially since 1995. Moreover, the related financial ratio has weak promotion effect to technology efficiency, and non-stated owned loan has no effect on this index basically. Since reform and opening up, financial development in the east and the middle has marked positive effect to TFP and technology progress, but in the west these effects are not notable.As a whole, finance is the core of modern economy. On the background to accelerate transformation of the mode of economic development, we should focus on both two sides:one side is to amplify the scale of capital formation, the other side is to improve capital allocation efficiency. The key point is to enhance both China's financial development level and efficiency. During this process, the following steps are rather important, such as to develop the financial system, to deepen the reform of China's stated owned bank, to promote the development of non-state owned financial institutions, to reduce administration intervention of government, and to accelerate the build up of multi-level capital market in China. All of these reform and actions are very useful to transform China's economic development model depending on high saving, high investment and high growth during this present period, which will finally promote good interaction among financial development, capital formation and economic growth.