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Financial Development and Economic Growth during the Period of Economy Transformation in China

Author: LiuMingWei
Tutor: LiTieGang
School: Shandong University
Course: Investment economics
Keywords: Financial Development Financial function Economic Growth Financial Institution
CLC: F832;F124
Type: Master's thesis
Year: 2010
Downloads: 268
Quote: 1
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Abstract

The research for the relationship between financial development and economic growth has been an important issue among the economic studies since the beginning of last century. Until now, most of economists tend to the point that financial development has significantly promoted economic growth, and lots of financial development theorists are also committed to construct various models to explain the mechanism between them. Among of these, financial function theory should be the summary and sublimation.The traditional financial function theory holds the point that financial development could significantly promote economic growth, and this could be accomplished by its financial functions. Financial development release its financial functions, and these functions then promote the saving rate、saving and investment conversion rate and investment efficiency, and ultimately promote economic growth by the channel of capital accumulation and technological progress. Meanwhile, this theory also provides a dynamic analytical framework for financial development. That is, the most important thing in financial development problems is financial function, financial function is the determination for financial institution, and financial institution must be adjusted to the financial function demand. When the demand for financial function changed, financial institution also must change to adapt it. This framework constitutes our starting point for analyzing China’s financial development problem.However, the traditional financial function theory is based on the market economy, it may be not suitable for an emerging and transitional economy like China. In the market-aimed economic reform, there exists various contradictions, such as planned economy and market economy、state-owned economy and non-state economy、administrative intervention and market operating mechanism, and under this condition, the relationship between financial development and economic growth may be different form the point that traditional financial function theory holds. Based on this consideration, we construct an extended functional framework for China. Within this framework, we point that China’s financial development not only aims to promote economic growth, but also it bears lots of policy burden, such as to finance for state-owned economy, priority to support key industries and areas. And then, we distinguish the two types of financial function, the one aimed to promote economic is called economic function, and the one aimed to support national policies is called policy function. We then analyze the relationship between them and find that the display of policy function could suppress the effect of economic function, and we ultimately get the conclusion that China’s financial development didn’t promote economic growth effectively. Further, we carried an empirical test for the relationship of financial development and economic growth using the data of China from 1987 to 2008, and the conclusion is consistent with the theoretical analysis.Finally, we provide a few brief policy recommendations for China’s financial reform. We believe that, China’s financial reform aims to promote economic growth more effectively, from the view of financial function, this requires changes in financial function. To achieve the optimal economic growth rate, financial function should gradually abandon policy function, actively perform its economic function, and in this process, financial institution should take corresponding adjustment too. Based on our theoretical analysis and empirical test results, we propose a few recommendations in several relative areas such as banking reform, relationship between banks and enterprises, interest rate reform, developing direct financing and so on.

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