The Research About Financial Openness’s Growth Effect And Its Risk

Since 1970s, developed west started to implement financial openness policy and hoped that the international capital flows and globalization of financial institutions could promote domestic economic growth, and the fact suggested that the financial openness had been one key engine of their economic growth. With the stratospheric growth of world economy in 1990s, economic and financial globalization became much deeper, based on Washington Consensus, developed west pressed and guided developing countries and regions to open their financial system, thus the globalization of finance underwent a remarkable deepening worldwide. Financial globalization and global allocation of production factors make financial openness become an inevitable choice for developing countries. China has been explored the right direction of openness since the reform and opening up in 1978, with the total amount of QFⅡ keeps rising and Shanghai-Hong Kong Stock Connect program being launched, China now obtains substantial progress, financial openness will be a key point of China’s future financial development strategy, concerning finance development’s impact, this paper studies financial openness’s growth effect and possible risk to help us give a comprehensive appraisal of financial openness and a proper opening "orders".This paper firstly determines the definition and measurement of core explanatory variable financial openness, and uses the proportion of the sum of a country’s foreign assets and foreign liabilities to the GDP in a certain year to measure the degree of this country’s financial openness. Compared with two freest economies in the world, Hong Kong and Singapore, China’ financial openness degree is much lower. And there is a big distance between China and the traditional financial magnates, such as the United States, the United Kingdom, Germany, Japan and Korea, all these mean that it is necessary for China to deepen policy of financial openness.Theoretical researches prove that the financial openness could increase the international capital flow and improve efficiency of finance market, and promote financial and economic development. But it puts domestic finance system into the world finance market and thus increase the domestic financial risk too. even leads a financial crisis. To make a comprehensive judgment of the effect of financial openness, this paper will consider both the economic growth effect and the possible risk.Empirical researches suggest that finance development could influence the effect of financial openness, a country with highly developed financial system could absorb and allocate capital rapidly and avoid volatility of economy which caused by big amount of capital flow. So this paper sets finance development as threshold variable to study how finance development influents the effect of financial openness.Hansen (1999) proposed a panel threshold model to solve the problem above. This model divides the sample into different regimes by the threshold variable, and estimates the parameters by OLS. Hypothesis testing and the construction of confidence region of parameters are based on "Bootstrap".This paper takes 88 countries which are observed for the years 2004-2013, and builds threshold growth model and threshold risk model, here are some conclusions:1. there are two thresholds in threshold growth model and thus the all sample countries are divided into three regimes according to finance development:low, medium and high finance development, in the low finance development regime, financial openness has a strong damping effect on economic growth, in the medium finance development, financial openness has a weak damping effect on economic growth, then if a country is divided into high finance development regime, the financial openness has a promotion effect, the result suggests that if a country wants to improve domestic economy, they should develop their financial system first.2. there are two thresholds in threshold risk model too and thus the all sample countries are divided into three regimes according to finance development:low. medium and high finance development, in the low finance development regime, financial openness strongly increases exchange market pressure index, in the medium finance development, financial openness weakly increases exchange market pressure index, then if a country is divided into high finance development regime, the financial openness will constrain the exchange market pressure index.The result of empirical research suggests that Macro-prudential supervision system must be built to monitor, assess and alert the capital flow risks and systemic financial risks. Countries should pay attention to the order of financial openness, improve domestic finance system first and then implement openness policy.