Financial Structure Evolution And The Quality Of Economic Growth

Everything is the unity of speed, scale, quality and structure. Accordingly, economic growth not only means maintaining a appropriate rate, but also increase in its quality. Financial development shall be valued both by its scale and structure. However, during its economic development and financial reform processes, China has long been one-sided pursuing high catching-up speed and quick scale expansion, while neglecting its development quality and structure issues. Eventually, this leads to an unfavorable matching between China’s high-speeded but low-quality economic growth and its finance development with expanding scale but unbalanced structure. Moreover, research effort both home and abroad mostly have long been expended on the nexus of financial scale and economic growth rate, while less on issues about financial structure or economic growth quality, least on the potential linkage between financial structure and economic growth quality within a unified framework.Based the conventional research paradigm of financial scale vs. economic growth rate, this thesis extended to adopting a new perspective of financial structure vs. economic growth quality. By empirically explaining China’s low-quality economic growth from the viewpoint of its unfavorable financial structure, this thesis tried to supplement and enrich the existing study in this area, and hopefully to provide policy enlightenments for efficiently promoting China’s financial system reform and improving the quality of its economic growth. After systematic review of theses related concepts and considering the particular research purpose, this thesis classified the economic growth quality into growth intensiveness and growth steadiness, and financial structure into internal structure and outward open structure. The main content of this thesis can be seen as made up of two sections, namely factual analysis and empirical analysis. Furthermore, the factual analysis focused on the statistical evaluations of China’s economic growth quality and financial structure respectively, while the empirical analysis mainly dealt with econometric test on the nexus between internal financial structure and China’s economic growth pattern, and the numerical simulation on the nexus between China’s financial open structure and its economic growth steadiness.The factual analysis proved the existence of double matching between China’s economic growth quality and financial structure. On the one hand, China’s economy had been characterized by high growth rate but low growth quality, equivalently extensive growth pattern and undesirable stability. Firstly, China’s economic growth pattern was found to be extensive, both its efficiency and sustainability were undesirable. After evaluation by respectively using industrial added value rate, TFP, energy consumption per unit of GDP, and Malmquist-Luenberger TFP, this thesis found that China’s rapid economic growth overwhelmingly depended on massive factor input and resources exhaustion. It found that growth pattern of those less developed provinces were not necessarily extensive, and those developed provinces not necessarily efficient. This kind of paradox even suggested that China’s economic growth efficiency declined with its inflating economic scale, in other words, this long-lasting manic pursuit of economic scale might instead lead to the extensive growth. Secondly, China’s economic growth steadiness were found to be unbalanced between double steady and double volatility. Based on the moment analysis and HP filter analysis, this thesis found that the output growth enjoyed rapid pace but low volatility, RMB exchange rate less volatility, while money supply growth high rate but big deviation from the secular trend, inflation rate high volatility. This so called double steady and double volatility phenomenon represented the conflicts among China’s macroeconomic objects. In order to maintain a rapid economic growth rate, these growth-oriented monetary authorities heavily relied on increasing money supply. Moreover, in order to keep RMB exchange rate excessively steady, China’s monetary authorities had to intervene open market operations and passively pump into liquidity. Consequently, this led to the significant deviation of money supply and great volatility of inflation rate.On the other hand, China’s defective financial system, characterized by inflating scale but malformed structure, was found to be inefficient. Firstly, Due to the long lagging internal structure optimization, China’s financial system had accumulated lots of structural issues, which became the intractable challenge for financial reform and open-up process. Banking loans had been the foremost channel for social finance, leaving direct financing share too low and corporate bond market development far lagging behind. Financing entities had been proved seriously unbalanced, with a absolute preference for nationalized entities in banking loans and stock financing, and with a absolute preference for government and financial institutes in bonds financing. China’s banking industry, with a high market concentration ratio, had been oligopolistic by the state-owned institutes, leaving the liberalization road ahead arduous and long. And China’s capital market, highly administratively intervened and lack of multi-level features, had been unable to realize a virtuous cycle of endogenous mechanism which then highly restricted its efficiency. Moreover, households’ financial assets had been concentrated and inefficiently allocated, due to the lack of high quality financial instruments and little access to international financial market under severely capital control. Secondly, China’s financial openness had been slowly advancing, with its capital control strategy characterized by "double tight, double loose". Results based on de jure and facto measures indicated that there still had been serious capital control in China given the undeniable liberalization route. When it came to the inward and outward open structure, it had been characterized by "loose entry and strict exit", which had been common in developing countries because of their low capital stock, financial repression and fear of capital flight. When it came to sub-item open structure, there proved to be a differentiated strategy according to which "loose for direct investment and strict for security investment". Compared with the excessively openness to direct investment, China had been hesitated in deregulating control on security investment.Econometric tests showed that China’s defective financial system, characterized by its malformed internal structure and undue government intervention might well explained this country’s long-lasting excusive economic growth pattern. By successively using panel unit root test, panel cointegration test, FMOLS and DOLS, this thesis firstly conducted econometric tests on the nexus between internal financial structure and economic growth pattern, and on the factors influencing financial internal structure, and then constructed a3SLS regression on a panel simultaneous equation model representing interactions between financial internal structure, government intervention and economic growth pattern. It found that non state-owned enterprises’ access to bank credits was the key financial structure affecting China’s economic growth pattern, and that security financing, bank monopoly and government intervention also have significant influences on economic growth pattern by affecting non state-owned enterprises’ access to bank credits. The specific mechanism could be summarized as follows. Non state-owned enterprises’ limited access to bank credits greatly retards the transformation of China’s economic growth pattern. Although the decline of banking monopoly wasn’t proved to directly promote the transformation of China’s economic growth pattern, banking monopoly still could be negative to economic growth pattern by restraining non state-owned enterprises’ loan from the banking industry. Similarly, although the direct financing hadn’t been proved directly conducive to economic growth pattern, it could contribute by facilitating non state-owned enterprises’ loan. There hadn’t been a significant effect between government intervention and economic growth pattern, but the former could be counter-productive by restraining non state-owned enterprises’ loan as well. In one word, there proved to be a conduction system within which financial internal structure and government intervention interplayed. Consequently, China’s long-lasting exclusive economic growth pattern could be well explained by its malfunctioned financial system characterized by high government intervention, high banking monopoly and undeveloped direct financing.Numerical simulation indicated that China’s long-term observed financial open-up structure had its historical limitations, which may lead to the extreme trap of low economic growth but high volatility. Firstly this thesis constructed a welfare evaluation criteria based on a quadratic loss function, and embedded it in the theoretical framework of a DSGE model with China’s typical economic characteristics. Then this thesis carried out optimization solution, log linearization, parameter calibration, bayesian estimation and hundreds of times of computer programming, in order to make comparative statistic and dynamic simulations, and long-term and short-term comparisons of macroeconomic effect among different liberalization strategies. It found that over open to FDI, which by no means was the macro-economy’s stabilizer, might in turn intensify its volatility. Moreover, China’s harsh control against outward security investment proved to exacerbate the short-term economic volatility as well. The specific mechanism could be summarized as follows. As China had pursued the "taking what we get" open strategy towards FDI since long time ago, local governments, with more counterparts following suit, kept escalating the investment attracting campaign, which facilitated lots of hot money to swoop in and intensified economic risks. Besides, cross-border FDI flows helped to transmit and spread the international economic cycle, and to pull up host country’s inflation rate. As for control against outward security investment, this policy had restricted households’ access to international financial markets, which in turn worsened capital shortage in China and magnified economic volatilities in the end. Therefore, over open to FDI while harsh control against outward security investment has its historical limitations. For the sake of stable economic growth, this thesis stands for supervising FDI efficiency and orientation, prompting outward security investment openness.