Financial Services Trade Liberalization And Financial Stability

In 1997, there were two coincidences happened in the word, which have far-reaching effect. The first is that the Asian emerging economies were involved in the Asian financial crisis shortly after their openness of financial industry. The second is that the members of WTO signed "Financial Service Agreement" (FSA) under the GATS, which brings 95% of financial service trade in the word into the road of liberalization. Does the financial service trade liberalization lead to the financial crisis? This is not only a theoretical issue, but also a practical problem: the transition period about the openness of financial service trade according to the WTO commitment will be over, will financial crisis like Asian financial crisis 10 years ago occur in china?There are various debates about the impact of financial service trade liberalization on financial stability in theory circle. An important reason is that those researches use comparative static analysis, so there is a great split between short-term effects and the long-term effects of financial liberalization. The paper uses the method of stochastic dynamic general equilibrium analysis, and constructs a DSGE model to analyze the impact of the financial service trade liberalization on financial stability for the emerging market economy. Based on mathematical deduction, we find out that in the beginning of financial liberalization the capital accumulation is relatively low for emerging market economy, capital marginal return is relatively high, the cost of information collection for foreign banks is high and the return of banking credit is also relatively high. Banks will experience initial stage with high-return and low-risk, leading to the sharp increase of net value. However, as foreign banks are more familiar with the host countries, the cost of information collection will decline, and the loan interest rate will also decline. When the domestic banks still have competitive advantage over foreign banks, which is becoming weak, those domestic banks are opt for some risky actions, which may lead the financial industry into sensitive period of crisis. If the domestic banks could tide over this sensitive period, and keep enough cost advantage over foreign competitors, they will enter into a steady stage with low risk. On the contrary, if macro-economic fundamental is also unstable during sensitive period of crisis, risk - resistant ability of banks is low, and financial supervision is insufficient, the banking crisis will break out.With the theory above, the paper surveys the Asian financial crisis in 1997 again from the view of financial service trade liberalization, and demonstrates that financial service trade liberalization is beneficial in the long run, but in medium and short run it may lead to unfavorable consequences. At last, the paper analyzes the financial stability of china under the new situation of opening-up in financial service industry. With the further openness of financial service trade, great amount of capital flow into china, credit expansion becomes very serious and asset bubble takes place; at the same time, financial service trade liberalization makes the competition between financial institutions more sever, and the financial supervision administration faces with great challenges. Those situations are same as the Asian 10 years ago. However, Chinese balances of payments are both positive for many years, so foreign exchange reserve of china is the number one in the world; the ratio of short-term foreign debt to GDP is relatively small; the capital account liberalization is incomplete; financial surplus still continues; china is a big country, as domestic need starts, the relay on the outside will decrease, and the scale effect of economy may be very significant. So, although china is on the very sensitive stage at present, if only the policy combination is suitable, china will smoothly tide over this sensitive period and financial industry will enter into a long-term steady development period.