Research On Differences Of Financial Development And Global Imbalances

Ever since the1990s, global imbalances have exerted profound impact onglobal economy, not only reinforcing new industrial division of labor across the worldand influencing the trend of international capital, but also immeasurably impactingthe development of both the real economy and virtual economy. The economicimbalance between the United States as the engine of global economy and China asthe manufacturing base is no doubt the most important, which has become the focusof academic study. Though the current account deficit of the U.S. and current accountsurplus of China has narrowed after the sub-prime mortgage crisis in2007, andeconomic imbalance has improved to some extent, there has been no fundamentalchange to the overall pattern of economic imbalances. The economic imbalancebetween China and the U.S. is still the focus of global economic imbalances. As forthe cause of global economic imbalances, scholars have conducted differentresearches from perspectives like investment imbalance, international division oflabor, international monetary system, differences in financial development, etc. Byanalyzing the differences in financial development of each country, this paper firstproposes the mechanism that financial development causes imbalance betweensavings and investment, which further leads to global economic imbalances. Thenfrom the aspect of the new international division of labor, this paper discusses that thenew international division of labor on the basis of financial development differencesbrings about trade imbalances, which serves as the microscopic mechanism of globaleconomic imbalances. In the ultimate, this paper analyzes the policy options of Chinaagainst the background of global economic imbalances.The first chapter is introduction. This paper first analyzes the overall status ofcurrent global economic imbalances, and contrasts its differences with previousimbalances. It points out the huge difference between China and the United States in financial development, which prompts researchers to search for the cause of thisimbalance from the angle of financial development. Then we define the concepts offinancial development, the differences of financial development and global economicimbalances. On the basis of literature review, the research framework of this paper isproposed, and research method, points of innovation, deficiencies are illustrated.Chapter Two is analysis on financial development differences and globaleconomic imbalances. This chapter first analyzes the current status and features ofglobal economic imbalances. Global current account deficit mainly occurs in the U.S.and the E.U., while emerging economies in East Asia such as China, Japan, andOPEC are major sources of current account surplus. In particular, China and the U.S.are typical cases of the current economic imbalance. It is noted that besides colossaltrade imbalance, there is huge international capital flow between deficit economiesand surplus economies. Emerging market economies with China as representative,export a steady stream of capital to the U.S, at the meantime of maintaining tradesurplus. What has caused this phenomenon? This paper focuses on the hugedifferences between China and the U.S. in financial development. It makes a briefanalysis of the current status of global financial development. While financialglobalization and financial integration has attained great progress, differences infinancial development between advanced economies and emerging economies cannotbe ignored. This paper conducts detailed quantitative analysis on total financial assets,financial structure, financial efficiency and financial openness of both China and theU.S. The analysis leads to the conclusion that huge differences in the above aspectsexist between China and the U.S., which lays the foundation for economic imbalancesbetween the two countries.Chapter Three discusses financial development differences and savingsinvestment imbalance. By analyzing the national income identity, this paper illustratesthe relationship between savings-investment imbalance and trade imbalance. If acountry’s private sector savings is too low, savings-investment gap is formed whichleads to the increase of net import and thus trade imbalance. Otherwise, trade surplusis resulted. On this basis, this paper analyzes the savings-investment imbalancebetween China and the U.S. from the perspective of financial development. The result shows that factors like financial market imperfection, lack of variety of financialinstruments, financial inefficiency account for China’s high savings rate and impedethe transformation from savings to investment. On the other hand, advanced financialmarket is the major cause for U.S. long-term low savings rate. Under the backgroundof financial globalization, when a country’s underdeveloped financial market cannotfully utilize excess savings, its capital will flow to countries with developed financialmarket in the form of foreign asset. This transnational savings-investmenttransformation mechanism is one of the major factors of global economic imbalances.Taking the case of China and the U.S. as example, this paper analyzes the mechanismthrough which savings-investment imbalance results in external economic imbalances.It then constructs the macro analysis framework that differences in financialdevelopment causes savings-investment imbalance and further leads to externaleconomic imbalance.Chapter Four is financial development, new international division of labor andglobal economic imbalances. This chapter first analyzes basic features of currentinternational flow of capital. On the one hand, emerging market economies haveaccumulated huge amount of foreign exchange reserves through foreign trade surplus,and invest this kind of capital to the U.S. in the form of portfolio investment, such asthe purchase of low risk and low return bonds like U.S. Treasury, which makes up forthe savings inadequacy of the U.S. On the other hand, the U.S reinvests some of thiscapital back to emerging market economies in the form of foreign direct investmentby transnational corporations. In this process of capital flow, the U.S. foreign debt isaccumulated, while high return from foreign investment offsets low interest expenseto some extent. The U.S. reinforces its comparable advantage in financial products byabsorbing substantial amount of securities, and at the meantime emerging marketeconomies reinforces their comparable advantage in manufacturing by acceptingforeign direct investment. As the result, new international division of labor betweencountries specializing in finance and those in trade are formed. This paper thenanalyzes the microscopic mechanism through which financial development exertsimpact on international division of labor. It points out that by promoting investmentin physical capital and development of human capital, financial development influences international division of labor. At the end of this chapter, this paperconducts empirical studies on the relationship among financial development,international division of labor, and economic imbalances by setting up a model andutilizing panel data of dozens of countries. The result shows that there is significantcorrelation between financial development and international division of labor andeconomic imbalances.Chapter Five proposes China’s strategies under the background of globaleconomic imbalances. This chapter first summarizes the research framework of thispaper. It presents that though the current global economic imbalance embodied in akind of “dynamic equilibrium” is still controllable, the outbreak of the U.S. sub-primemortgage crisis reminds us that there are huge problems in the present U.S. pattern.For a long term of time, the U.S. has relied on foreign debt to compensate forinadequacy of domestic savings. Any problems in any stage will cause immensecatastrophe. As a result, it is important to adjust global economy before more seriousconsequences are caused. China, as a major imbalanced party, should actively adjustthe current status for the sake of either its own economic safety or global economicstability. This paper studies China’s strategies from the perspective of financialdevelopment. To start, China should change its export-oriented economic strategy andstimulates domestic demand. Secondly, China should optimize its industrial structureand propels upgrading of foreign trade structure. Thirdly, it should adjust policies onintroduction of foreign direct investment in China. Fourthly, it should initiate directinvestment in foreign countries and accelerate the transfer of labor-intensiveindustries to other countries. The fifth is to adopt various strategies in promotingdomestic foreign efficiency.