Financial Development Affects Economic Growth Of Multiple Mechanisms

The key issue of this thesis is that through which channels China's financial development has an impact on economic growth. We are concerned about three mechanisms. In particular, we research into the impact of financial development on growth at three continuous stages (before, during and after) of effective capital formation. This thesis consists of seven chapters.Chapter one extends the connotation of financial development in the context of China's economic transition. We argue that the supply of financial services and the evolution of financial structure are both critical when reviewing the evolution of China's financial system. Financial development in China consists of two aspects. The first one is that financial development means continuously improving basic functions of financial system. The second one is that during the economic reform, financial development needs financial structure adjustment, especially banking marketing structure adjustment in China, in response to the economic development. The second aspect is lack of enough attention in previous research.Chapter two first reviews literatures, analyses several mechanisms through which financial development has an impact on growth and causality between financial development and growth. Then we construct two indicators to measure the financial development. The first indicator is the ratio of credit of all financial institutions to GDP and the second one is the degree of competition in banking market. Finally we make a choice among several econometric techniques.In Chapter three, we first present some stylized facts about the financial development-growth nexus. Then we analyze the process of China's financial system since China's reform and opening-up. We find out that the banking reform is the core of the entire process. Finally we take a look at the changes in the credit capital management system.We launch our positive analysis since Chapter four. In this chapter we focus on the role of financial development in economic growth before the beginning of effective capital formation. Under the circumstance that continuously enlarged income disparity has negative impact on the alteration of high saving mode and effective capital formation, using provincial data from 1992 to 2005 and dynamic panel data technique, we find that financial development can facilitate residents'effective saving through reducing the income disparity. So financial development can promote to alter high saving mode, improve investment effectiveness and therefore accelerate economic growth.Chapter five focuses on the role of financial development in economic growth during the effective capital formation. As we all know, the reforms on property right of banks has been going on for many years, but the banking market structure has not been changed much. Using provincial data from 1993 to 2004 and dynamic panel data technique, we investigate the relation between capital formation and banking market structure. We find that (1) the change of banking market structure is a result of reforms in SOEs and financial system; (2) the banking market structure has a nonlinear, i.e. U-shaped curve, effect on investment, in the sense that it enhances the response of capital formation to growth. The main explanation of this phenomenon is that the needs of external finance of SMEs still have not been satisfied with the degree of concentration in banking market decreasing. The results support the idea that financial development promotes the transition of capital formation from central planning-oriented to market-oriented system.Chapter six focuses on the role of financial development in economic growth after the effective capital formation. Using provincial panel data of China (1993-2005), we find that financial development can decrease the responsiveness of economic growth to exogenous shocks, thus it offers a good environment for stable economic growth in the long run. We believe that this effect comes from optimizing the composition of investment during economic development through financial development. The further evidence supports this idea.Based on the previous research we come to the conclusion. Generally the financial development in China during last 30 years has positive impact on economic growth. On the road to the future we may encounter a lot of obstacles. Further reforms in financial system are very necessary.