Research On China’s Financial Stability Under Financial Innovation

Looking through the development process of financial innovation, it is not difficult to see that comprehensive and multi-level financial innovation has become a norm. Financial innovation not only propels the evolution of financial structure and the deepening process of finance, bringing in new sources of motivation for the growth of modern economy, but its complexity also cause great impact on financial stability. The financial system is becoming an increasingly open, dynamic and non-linear huge complex system. Excessive financial innovation causes the financial market to disintermediate and securitize day by day, amplify the leverage effect of derivatives and foreshadow the exceptional fluctuations of the financial market and frequent financial crisis. The breakout of this round of global financial crisis has especially made people realize that financial innovation is a double-blade sword, which cannot be over-used, let alone indulged. Therefore, how to avoid financial innovation’s negative effects on financial stability and maintain the steady operation of finance has become a tough issue for the financial industries of many countries nowadays.Utilizing interdisciplinary subjects and theories such as finance and complex systems theory, together with econometrics methods such as Granger causality test and BP neural network model, this disertation, taking the background of financial innovation as the object of study, analyzes the mechanism of action of relevant factors under the background of financial innovation toward financial stability based on the combination of theoretical research and empirical analysis, qualitative description and quantitative analysis, as well as China’s financial stability, devises a comprehensive evaluation index system for financial stability, and constructs an early warning model of China’s financial stability under financial innovation. Combining China’s current financial development and innovation practices, the disertation proposes stability and security mechanism that suit Chinese characteristics. In general, the disertation is divided into four parts.Part one:Theoretical research of financial stability mechanism under financial innovation. From the perspective of "system-function", this part remarks the boundary of the meaning of financial stability under financial innovation and extracts the five characteristics of integrated, responsive, metastable, non-linear and effective of financial stability under financial innovation. Based on this, this part re-combs and summarizes factors that affect financial stability and relevant stability mechanism under financial innovation and provides fundation, channel and direction for the following study.Part two:this part mainly analyses the influence mechanism of relevant factors toward financial stability under financial innovation. With financial innovation and the complexity of financial stability as support, this part conducts a comprehensive analysis of the direct and indirect influence mechanism of financial innovation toward financial stability from the following three levels, the direct influence mechanism of financial innovation toward financial stability, the influence mechanism of macro-economic operation factors toward financial stability under financial innovation and the influence mechanism of financial elements changes toward financial stability under financial innovation. The result shows that the influence of financial innovation toward financial stability is comprehensive and complex. The complex relationship is reflected not only in the multi-level interaction between the two, but also in the general time lag and dynamic non-linear relationship.Part three:empirical study of China’s financial stability under financial innovation. Firstly, through the comparison of the existing evaluation index systems with domestically and internationally, the dissertation discusses their reference value in financial stability evaluation and the applicability in the evaluation of financial stability under financial innovation. Based on this and with financial innovation as the background, this part adopts viewpoints of system theory and, with reference to the idea of "prudent macro management" by IMF, constructs financial stability evaluation index system including macro-economy financial index, financial system internal stability index and international financial environment index. And adopting econometrics methods such as Granger causality test, this part first further proves that there exists direct and indirect connection between financial innovation and China’s financial stability. Finally, using BP neural network model, this part constructs China’s financial stability early warning model under financial innovation and makes a forecast of the overall operation status of China’s finance in2012. The result shows that under the background of financial innovation, the changes in internal and external financial environment have become the primary factor affecting China’s financial stability, but generally, China’s financial stability in2012is in low risk status.Part four: advice for the optimization mechanism design of China’s financial stability under the background of financial innovation. The root cause of the low risk status of China’s financial system lies in the insufficient supply of financial innovation, structural disequilibrium of financial system and the serious lag of the financial regulatory system. This part proposes the optimization mechanism for China’s financial stability under financial innovation. First, it is necessary to increase the ability of China’s financial system to self-resist risks by continuing to deepen financial reform, building a complete conversion period financial prudent macro management system and strengthening Central Bank’s management function and at the same time strengthen external guarantee for the steady operation of China’s financial system by speeding up the process of property rights system reform, completing company management, completing credit reference system in order to create a good credit environment and promoting the application of computer network technology in the financial domain.