Research On The Influence Of Financial Deepening On China’s Short-term Cross-border Capital Flow Effect

In the context of increasing global capital market linkages,the level of financial market development has often become the key to attracting foreign investment.Markets with higher levels of financial development can provide more competitive investment options,which make an impact on cross-border capital flows.For emerging market players,the main form of financial development is financial deepening.Compared with developed markets,emerging markets with lower levels of financial deepening are often at a disadvantage in the wave of international capital flows,and are more vulnerable to shocks in the event of an economic crisis.So improving the level of financial deepening has become the goal pursued by emerging markets.At the same time,it should be noted that raising the level of financial deepening does not always lead to the positive economic effects of cross-border capital flows.Moreover,financial deepening may even cause capital flows to hit the economy.As a market with large scale of cross-border capital flows in the world,the deepening of financial deepening has important strategic significance for China’s economic development.Therefore,determining whether there is a correlation between the level of financial deepening and the effect of cross-border capital flows,and its direction of impact on cross-border capital flows,is conducive to China’s formulation of a financial deepening strategy in line with economic development and cross-border capital flows.This paper first defines the financial deepening through the induction and combing of previous research,and selects the measurement methods of financial deepening and cross-border capital flows.Then,based on the simple endogenous growth model,the paper analyzes the impact of financial deepening on short-term cross-border capital flow effects from a theoretical perspective,and demonstrates its transmission mechanism from three perspectives: investment channel,financial intermediary channel and spillover effect channel.After that,it studies the current situation of the effect of China’s financial deepening on cross-border capital flows,and analyzes whether there is a systematic relationship between the two in China and analyzes the characteristics of transmission.Then in the empirical test section,this paper tests the hypothesis of the upper part based on relevant data in China.Finally,through the research conclusions,we make the evaluation and recommendations of China’s financial deepening.In the empirical study,this paper selects China’s data from 1982 to 2017,taking short-term cross-border capital flows and financial deepening as the core variables,choosing the exchange rate difference(ER)between China and the United States,the interest rate difference between deposit and loan(LC)and foreign direct investment.Net inflow(FDI)is used as a control variable.Firstly,the VAR model is constructed to empirically study the effects of financial deepening on short-term cross-border capital flows,and then construct a threshold autoregressive model(TAR model)for nonlinear testing.Through the analysis of impulse response function,it is found that financial deepening has an impact on the short-term cross-border capital flow economic effects through investment channels,financial intermediation channels and spillover effects channels,and the overall performance is positive.In the non-linear test of China’s financial deepening on short-term cross-border capital flows,it is found that when the financial deepening level FD ≦ 133.80,the short-term cross-border capital flow economic effect is positive.Moreover,when 122.75≦FD≦133.80,the effect of short-term cross-border capital flows is higher than when FD<122.75,thus drawing the conclusion that the different levels of financial deepening have an impact on short-term cross-border capital flows.Finally,it puts forward policy recommendations: improving the level of financial deepening,strengthen liquidity supervision and management;promoting the supporting role of the real economy;focusing on the quality of capital inflows and give full play to their joint positive Impact;playing a facilitating role in short-term capital inflows and accelerate the internationalization of domestic financial institutions.