The Structural Difference Of Financial System And Global Imbalance

Global imbalances are hot topic of international economics recently. Especially with the the trad deficit of U.S. widen, more and more economists are attracted to study the global imbalances. Economists all over the world have provided several viewpoints on the causes of global imbalances. Basing on the Moneatary Approach to the Balance-of-Payments (MABP), this paper argues that the global imbalances are monetary phenomena which related to international capital flow. We try to study the global imbalance from the viewpoint of financial system. Wheather a country have an advanced capital market decides the country can attract enough capital through FPI, then causes to the surplus of capital account. Capital market is related with financial system. In the market-based financial system countries such as U. S. and U. K., international capital inflow is large because they have developed capital markets, then cause to the surplus of capital account. While in bank-based countries such as Germany and Japan, in which capital markets are relative backword, international capital inflow is not as large as former countries. On the contrary, domestic capital outflows largely through FDI, resulting in the deficit of capital account. The two accounts of balance of payment are Granger caution for each other. Through analyzing penal data from 18 industry countries, this paper discovers that, the portfolio inflow is significantly positively related to the stock market development, and significantly negatively related to current account. So, the capital market of one country can affect the capital account through portfolio investment, which reflects the problem of financial structure of one country.The difference of financial system can attribute to the origin of law. According to LLSV's theory of law and finance, common-law countries generally have developed stock markets because they have the strongest legal protections of investors, so their financial system are characterized by market-based. Civil-law countries' stock markets are relative backward because weak legal protections of investors, so these countries' financial system are bank-based generally. In some sense, the global imbalances are related with the origin of law. The effect of law on the financial system embodied not only the capital markets, but also the development of banking of one country. On the other hand, law is the independent element affecting capital flows. If one country has good legal protection of investors, large capital inflows inducing the surplus of capital account. So law is related with global imbalance. Basing on the study of LLSV, we make a positive test using 48 countries (regions) statistics about balance of payment, and results show that common-law countries have significant differences with civil-law counties on balance of payment.Both law and financial system affect the balance of payment of one country through portfolio ivestment. We can find the importance of FPI in using foreign capital to a developing country. This paper compares the economic results of FDI and FPI, and results show that both of them are two kinds of modes using foreign capital, and should be used reasonably, because they can produce profitable influence to host country. From the comparison of China with Indian, we can understand completely that the importance of the development of financial markets to a large developing country.The traditional economists analysis current imbalances using structural elements in "the Structral Approach to Balance-of-Payments" (SABP), while in this paper we extent to capital imbalances and study global imbalances combining current accounts and capital accounts. An important conclusion of this paper is global imbalance is a structural problem essentially, so expenture policy is not efficient solving global imbalance in long time. For one country, the current account and financial imbalance reflect domestic problem of economic and financial structure respectively. We should adopt supply policies about structural problems so as to solve the external imbalances.This paper provides some suggestions for our country's economic development:(1) In solving external imbalance, except demand policies to add domestic efficient demand, the most important measure is supply policies to adjust domestic economic and financial structure, such as R&D policy, industry policy and institution innovation policy et al.(2) The preaciation of RMB will not produce positive effect to adjustment of Sino-US trad deficit and global imbalance. It is most important for China to transfer economic growth mode from export-orient to domestic comsuption-orient.(3) In development of financial system, wheather market-based or bank-based, capial market are very important, because the function of capital market embodied in not only financing for corporations and prefecting corporate governance, but also deciding wheather one country can attract foreign capital reasonably.(4) In using foreign capital, FDI is the main proportion using foreign capital in our country, but FPI will become another important mode in long time, so we should pay attention to it.(5) In our country's legal construction, considering that China is German-civil-law origin country, we should abopt the positive elements from common-law.(6) In reforming of our country financial system, except perfecting credit mechanism of commercial banks, we should develop financial markets to eliminate "capital flow dilemma". In development of our country's capital market, we should establish a diversified market including not only a advanced stock market but also bond and derivative financial product markets.