Research On China's Capital Allocation Efficiency Based On Finance Development

Scholars from home and abroad both regard that the development of financial system can promote the growth of economy in the long run through the accumulation of capital and improved efficiency in resource allocation, especially the impact on the latter one, which is the basic function of the financial market. As a developing country, China owns relatively scarce financial resource compared with another manufacturing factor—labor. So efficient using of capital is of key importance to a stable and sustained growth of economy. Such a background makes it both realistically and theoretically important to make this research. The main points discussed in this paper include the following:study the mechanism of how financial development leads to improved capital allocation efficiency, and the correlation between the allocation efficiency and financial development, find out whether there is a causal relationship and put forward policy suggestions.At first, this paper uses theoretical analysis and model deviation to analyze the financial process in the growth model of economy, and illustrates the mechanism of how financial development leads to improved capital allocation efficiency. In early classic economic growth theory and new classic theory of economic growth, finance promotes economic growth only through capital accumulation, while in endogenous theory of economic growth, finance promotes economic growth through the impacts on the efficiency both in the conversion from savings to investment and the allocation efficiency—which is especially important for the economic growth in the long run. Financial development can achieve the goal through the following channels like information collection, investment screening, risk spreading, corporate monitoring, advocating of creativity and new technologies and investment in human capital.In the second place, this paper calculates the investment scale and capital allocation efficiency of since the opening up and revolution from 1978, and compare them with those of Japan, South Korea, Singapore, Thailand and Hong Kong during the period of fast development, and gets a general understanding of the investment scale and capital allocation efficiency of China. The comparison suggests that China's investment scale does not stand at the highest level, except in some particular years, the capital allocation efficiency is not low. But since 2005, coexistence of degrading efficiency and elevating investment scale appeare, which means that the fast development owes to the enlarged investment scale with lowered capital allocation efficiency so the transformation of China's economic growth mode is in urgent need.The third, this paper selects the annual data of 30 provinces in China during the year 1991-2008 to build panel data covering the eastern, western, and middle part of China, and then carry out empirical test about the impact on capital allocation efficiency brought about by the factors such as financial development. The research finds that because of the fact that Chinese enterprises heavily depend on indirect financing from banking industry, so banking sector has a remarkable impact on the capital allocation efficiency, marginal output capital rate is proportional to the loan-deposit ratio, but is inversely proportional to the deposit/GDP ratio; while stock market has not yet played a significant role in promoting the capital allocation efficiency. This fact demonstrates that China should further improve the marketization level of the financial market and the scale of direct financing from capital market.The fourth, this paper uses the data from China during the period through 1991 to 2008, and applies principal components analysis to abstract the financial development factors and hence build financial development index; and then uses panel data model to calculate the capital allocation efficiency in different areas of China and the impact of financial development on the capital allocation efficiency. The research finds that viewing from the two periods of 1991-2000 and 2001-2008 respectively, a descent gradient in capital allocation efficiency from eastern region to the middle region and to the western region is discovered. After the entry into WTO, the overall capital allocation efficiency has gained rapid increase, especially in the middle region. The impacts of financial development on the capital allocation efficiency vary noticeably from region to region:while the impact is most remarkable in the eastern and middle areas, there is no evident correlation between financial development and economic growth in the western areas.