China's Financial Stability With The View Of Financial Deepening

Financial deepening theory is concerning financial problems of developing countries. Since 1970s, many countries began to transform the policy-oriented finance system into the market-oriented finance system under the direction of the theory. The reform brought the growth of the economy and increased the efficiency of financial system. While financial crisis broke out later in most of the countries. Since 1980s, China began to deepen the financial system step by step and made great achievement. A modern financial system came into being. The financial deepening improves constantly in quantity, while existing salient problem in quality and the financial system is fragile. Therefore, how to keep the economical growth and financial stability is a significant problem for most countries.ⅠA Review of development of Financial Deepening TheoryMcKinnon and Shaw first offered financial deepening theory in 1970s, which discussed financial development from the angle how finance contribute to economy. And then, the theory began to develop step by step. Some economist(kapur, mathieson etc.)constructed logical models which made great contribution to the theory. Financial deepening refers to carrying out some policies to diminish the phenomenon of financial depression that existed in the developing countries. It lies on four aspects: reforming financial institution, developing capital market, carrying out liberal financial policies, innovating financial products. In this way, the development of finance and that of economy might be compatible so that a desired economic growth could be expected. Because the core of financial deepening theory is raising the ratio of saving and investment,enhancing financial efficiency and optimizing financial structure, the measurement of financial depth should include quantity index and quality index.ⅡA Framework of Financial Stability .Financial stability is a macro-concept. It requires the following three parts run well—financial institution, financial market and financial infrastructure, and can assess, prevent, solve the financial risk correctly. Application of Fuzzy comprehensive evaluation in appraising financial stability is a test in quantitative evaluation, which supplies a comparatively scientific method for financial stability estimating and also is helpful to building up the financial stability index in the future. Financial instability is the nature of financial system. It has been spurring the governments and the international economic organizations to establish the last resort, deposit insurance system, and financial safety net to take the stability of the whole financial system as being important that the financial crisis erupted frequently .ⅢThe theoretical and empirical analysis of the impact of financial deepening on financial stabilitySince 1970s, most of the developed and developing countries began to deepen the financial system. These countries reformed the traditional financial institution, loosened the control of interest rate and exchange rate and opened the financial market to foreign investors. The reform not only brought the growth of the economy but also increased the fragility of financial system. Firstly, institution disequilibrium brought institution change. There maybe some institution vacuum which could result in financial instability in the process of the change. Secondly, the volatility of financial asset price is inevitable. Many financial turmoil came from the extremely volatility of asset price in practice. Thirdly, the marketing of interest rate and the freedom of foreign exchange rate could effect negatively the growth of economy and the stability of finance system. Fourthly, combined banking also influence the function of financial institutions and volatility of financial asset price. Fifthly, the lowering entery barrier to financial market could decrease the rent of financial industry and increase financial instability. Sixthly, capital account liberalization must result in large scale capital-flow which could bring about huge risk. Finally, financial innovation brings not only the new chances to gain profits but also the new risks. As any innovation means of setting down the new playing rules, it can change the advantage pattern disparately. As the largest developing country in the world, China shares the general features with other developing countries, and has her own advantages and weaknesses. By analyzing and introducing the experience and lessens of other countries` finance deepening, and comparing those with the characteristics of China, we will hopefully be more sober than aimless, and take more shortcuts than tortuous paths in our finance opening.ⅣThe assessment of the situation of China`s financial stability in the process of financial deepening reformChina began to deepen the financial system step by step since 1979. China`s deepening reform can be divided into two procedures: the first procedure is to construct financial framework(1978-1991), the second is to adjust and perfect financial system(1992-). In the past twenty years, the financial industry has achieved drastic development, its structure has changed remarkably. The amount of financial assets in China increased very quickly, and it even grew much faster than GDP; the contribution of direct loans to the finance decreased, while the contribution of M2 and securities increased. These facts imply that the financial deepening improves constantly in quantity, the role of finance in the economy become more and more important. However, the intrinsic weakness of financial structure in China is also well observed, that is, the quality of financial deepening is overestimated, the ability of risk control is weak and the banking system is fragile. Although the financial system of China still functions normally, there are many hidden perils which probably will lead China to great financial instability. The main instability problems are found as follows: bad assets of state-owned commercial bank, disharmony of finance industrial structure, asymmetry between the financial structure and the economic structure, imbalance of the financial market structure, irrationality of the financial property structure, incapability of the financial supervision structure, etc.V the path choice of the adjustment of China's financial deepening and financial stabilityFinancial deepening and financial stability is absolutely no contradictious, but there is no ready path for any country to take, one must find his own path which really fits. The financial stability of our country mainly depends on two basic conditions: one is the macroeconomic circumstance and its structure which are the foundation of the decision-making; the other is the robustness of the financial system, including the institutional arrangement for the functioning of financial market, financial institution and the financial transactions.