The Transition Of China's Financial Development Productivity Effect

Finance has played an important role in the economy. Ever since the birth of money, the relationship between finance and economy has been interdependent. Schumpeter argued that the invention of bank credit has led to the increasing prosperity of innovation. The reason behind is that the imitators have been quickly attracted due to the financial supports therefore the initial innovations have created economic prosperity. But the financial support has not been easy for the economy, the excessive expansion of financial markets triggered the economic crisis in a few cases, namelyhe Great Depression in 1930 and the global financial crisis in 2008.. It has not only increased the volatility of economic growth, but also resulted in the loss of social welfare. Therefore, a healthy financial system is necessary in the operation of economy.The development of finance is of great significance to the economic growth from the point of economic development in China. But in the economic transition period of China, the financial sector has been regarded as a slow development department due to its huge institution, inefficiency and slow pace in reform. From this perspective, the role of finance on the economic growth is also not clear enough. Based on the endogenous growth theory with observation of the research findings of financial development theory in the nineties, by taking reference of the viewpoints from the theory of Financial Resources and Financial System, the study has regarded finance as an important resource in the economic growth and taken the financial development in China's transition as a research theme. In the study, mathematics and quantitative methods have been applied to analysis the allocation efficiency in economic growth where finance was taken as factor recourses. By doing so, this paper aims to examine the dynamic relationship between the financial development and the economic growth efficiency in the process of China's transformation.Chapter one is an introduction. This chapter proposes the questions on the theory relationship between financial development and economic growth as well as the influential role of finance in China's economic growth.The answers to these questions focuses on the financial productivity in the period of China's transition. This is not only the further extension of the financial development theory, but also the re-authentication to the influence of the financial development in the China transition period. In addition, this chapter defines the research theme and indirectly put forward the hypothesis, in the end the chapter pointed out the research significance and research value.The second chapter is the literature review. Firstly, having discussing the financial development theory and the literature reviews in this field, this chapter points out that the theory and logic relationship of financial development is based on the development of economics and the theory is not isolated in the study but closely interrelated with economic growth. Secondly, this chapter introduces the endogenous growth theory, and argues that the relationship between financial development and economic growth is represented by the connection of financial development and total factor efficiency. The productivity effect of financial development is an important engine for the economic growth in the framework of new growth theory. Furthermore, the chapter reviewed the foreign and Chinese literature in the relevant sectors, and discusses those research findings, achievement as well as shortages. In the end, this chapter summarizes the research methodologies in this field.Chapter three focuses on theory analysis. Firstly by constructing a static general equilibrium with optimization of production, the paper describes the micro foundation of the efficiency while the productivity and total factor productivity are defined. Then the paper analyzed the mechanism how financial development foster the total factor productivity thereby affects the economic growth efficiency. This paper discusses the affection in direct contact, indirect contact and dynamic contact. The approach of financial development affects on economic growth is illustrated in the argument that finance has the ability in guiding the allocation of resources in promoting the growth of total factor productivity in addition to its function of capital accumulation in promoting economic growth., Finally, the paper exams the mechanism by applying two simple mathematical models. Chapter four is empirical analysis. This chapter analyzes the status of financial development and economy growth in the period of China's transition from three dimensions. Firstly, by making analysis of the feature of the total amount, structural feature and efficiency feature of economic growth, this paper proposes the motivation feature and efficiency feature of economic growth in China. Secondly this paper analyzes the financial development in transition from three aspects namely financial scale, financial structure and financial efficiency. Thirdly, this paper reveals the statistical data connection between financial, economic growth and regional differences. Finally, based on the paradox of relationship between financial development and economic growth as well as the current interpretation of the research literature, this paper argues that such question shall be answered in the perspective of production efficiency which paves the way for the empirical test of chapter five.Chapter five is empirical test which core content is the empirical study on the productivity of the financial development by using quantitative methods. Firstly, this chapter puts forward the hypothesis based on the previous research findings and then reviews the test methods on efficiency. The paper points out that the stochastic frontier production function is an appropriate approach to analyze the efficiency. By using a provincial-level data, the study applies stochastic frontier production function based on endogenous growth theory to test the financial development productivity in the period of transition. The research findings shows that the productivity of financial development scale is positive negative, the productivity of financial development structure is positive, the productivity of financial development efficiency is positive; Financial development plays a different role in the economy depending on different stages of economic development; The classified empirical tests on different regions at different development levels also shows the regional differences and non-linear relationship features in the productivity effect of financial development.Chapter six is an extension of research. According to the degree of productivity effects that financial development in transition period plays, this chapter takes the fiscal factor and opening-up factor into the research framework and makes studies on those influential factors respectively by taking their effects on capital accumulation as a starting point, Based on the empirical test and relative literature, the study discovers that both fiscal scale and foreign direct invest (FDI) in opening-up environment have affected the financial development productivity effects in different degrees. Focusing on the fiscal feature in transition period and the dynamic relationship of fiscal scale between centralization and decentralization of fiscal function, the test result shows the negative effect. The finding reveals the fiscal function in transition. The offside of fiscal functions and the lack of financial functions inhibit the productivity effects of finance. As to the role of foreign direct investment, the study discovers a substitutional relationship which plays a negative effect on productivity of financial development. All of this has a close relationship with the scale of FDI and the field of FDI. The growth of FDI of China is based on the cheap labor resources; it just plays a simple role an economic growth without having full play in e technological spillover effect in addition to the observation of financial development.The last chapter is a conclusion. Firstly, based on the research findings of the previous chapters, this chapter aims to answer the four questions on the theme of financial development and economic growth thus to draw a conclusion of the paper. Secondly, this paper summarizes the research findings by illustration of some policy implications from four aspects. In the end, the paper raises some shortcomings in the study proposes a research potential that may require further studies.