The Study Of Relationship Between Financial Development And Fixed Asset Investment

The development of economic society can not be separated from financial development that economists had already paid attention on. Joseph Schumpeter had pointed out the important of financial development in Theory of Economic Development 1912. Edward S. Shaw and John G. Gurley had given the conception of financial development clearly in Money in a theory of finance in1960. The Modern financial development had been given by Raymond Goldsmith in whose work financial development had been looked as an evolvement of financial structure. And the main content of the paper is the relationship between financial development and fixed asset investment.It is introduced the aim of the paper, the theory and works of financial development and fixed asset investment at home and abroad in the first part of the paper. In this part it is introduced the forming processes of the financial theories and the important contributions of different financial theories. It also introduced the research theories methods and results made by Chinese and foreign scholars.The financial development has played an important role to fixed asset investment in the development of economy. Financial development especially the securities market and financial contracts continue to intervene in the development of the whole field of fixed asset investment. And it can ease the corporate governance problems in the process of fixed asset investment operation, reducing the phenomenon of "Free Rider" and make an environment which is propitious to developing fixed asset investment. Financial development can promote creating and transferring information of fixed asset investment and reduce the cost of getting information and assessment of investment opportunities of fixed asset investment, providing enough information and make a good investment environment of fixed asset investment. The development of finance makes for reducing the transaction cost and risk of fixed asset investment and promotes saving. This part also introduces some theories, papers and research method of fixed asset investment. At last it explains the construction of this paper.The second part summarizes the theories of financial development and fixed asset investment and analyzes the status quos of financial development and fixed asset investment in China. It divides the financial development into three parts namely: bank system insurance and securities business in this paper. And it defines these indexes by the definition method of FIR namely financial interrelations ratio which was given by Goldsmith who defined FIR / M 2/GDP in which M 2 is broad money. In this paper it uses presents the total income of bank system in China and uses BANK presents relative development scale that is the natural logarithm of ratio of and gross domestic product. It uses ba_g=ln(BANK/ GDP)presents the total market values of securities business and the relative development scale of securities business is presented by STOCK st _ g =ln( STOCK/GDP). The total premium of insurance business is presented by INSU and ins _ g = ln(IN SU/GDP) presents the relative development scale of insurance business. And the total national fixed asset investment is presented by FI and fi _ g = ln( FI/GDP)is used to present the relative scale of fixed asset investment. The paper uses the data of these indexes of 16 years from 1992 to 2007 as the sample data.We should test the stationarity of sample series before building model and we find they are not stable but their second order differences are. Then it builds the model which is a VAR (2) model. When testing the model's stability we find that all the roots of the model are inside the unite circle which means that the model is stable. Then we find all the fitting degrees are above 0.98 that means the good stability of the model too. We perform the Granger causality test of data to find the relationship of these indexes.Granger causality test analyzes the causality between financial time series by which we know that there are no bidirectional or unidirectional significant causalities between all the variables or the combination of some variables except bank system is the significant cause of insurance at 5% significant level. As insurance starts relatively late in China and its scale are smaller than other two departments insurance is influenced by bank system which is the main force of financial system significantly. And mechanism of securities business is not perfect in China and the high index of it is not as well as we think which can't reflect to bank system very well. Bank system is controlled by government who use it to make macro-control to economy and the interest rate deposit reserve both be made by government. And the whole can be considered as necessary means of the macro-control other than the reflection to market. There is no significant Granger causality between financial development and fixed asset investment in China as the presence of deflationary pressures and weak economic expansion insufficient domestic demand and imbalance development of different regions. As we know there is no harmonious development between financial development and fixed asset investment and as a result of that they can not promote each other. The low level marketization can't do resource allocation effectively. As the main sources of fixed asset investment are self-prepare capital and others the investors with incomplete information only can reflect to the policy of government as a result the causality between financial development and fixed asset investment is very weak. Meanwhile, as known the variables are not stable we analysis the model through co-integration test and find there is a co-integration relationship. This means a short term deviation can't cause a long-term reflection as there is long-term stable equilibrium relationship between the variables because what the model would be back to the equilibrium relationship under the function of error correction model after a short-term deviation. Then we built the VEC model and analysis it meanwhile, we found the fitting effect of it is not good as VAR model and we did not do as many analyses as we did to VAR model.We find that the developments in financial system are out in line and financial deepening level is too low the financial structure is not perfect and the efficiency of resource allocation is low all these result the un-efficiency of financial development to economy. The sum of fixed asset investment of China is larger every year but it can not satisfy the development of economy and the effect to finance is not significant. Meanwhile, we must notice that there is a long-term stable equilibrium relationship between financial development and fixed asset investment as a result that a short-term effect can not cause a long-term result.