On Financial Capital In Modern Market Economy

Finance is the crucial part of modern market economy,and financial capital is one of the main factors.A large number of theoretical and empirical analysis shows that the financial capital and financial system played an important role in the global economy.However,the global financial crisis in 2008,reminds many scholars that,finance may hurt economy if financial capital is not be well managed.In China,on the one hand,since the 21 st century,the economy continues to suffer from the negative impact of "financial anomalies",such as the contradictions of macro "excess liquidity" and micro "liquidity squeeze","financial self-cycle" phenomenon in large numbers,financialization of non-financial corporate profits sources(economic hollowing-out)and so on.On the other hand,the return on capital of financial sector continues to show an upward trend since 1980,and greater than return on capital of non-financial corporations,with the gap(named as relative return on financial capital)showing a growing trend.Through these two phenomena,we can see that,the relationship between finance and economy has changed in modern market economy,while the financial capital also has distinct characteristics.What the characteristics of financial capital are in modern market economy,and how financial capital influences the economic development,are important questions worthy researching on.The research on this problem should be an essential part in model economic and financial theory,but little research has discovered the characteristics and development rules of financial capital in modern market economy,from the perspective of return on capital in financial sector.This article tent to do some effects on it,and based on it,to seek a way to help China out of the economic predicament.This article is arranged to 8 chapters.Chapter 1 and chapter 2 are introduction and literature review respectively.Chapter 3 combed the related phenomenon and the stylist fact of financial capital.Based on the financial statistical yearbook and CSMAR listed enterprise database,I compute return on capital of the financial sector capital from 1980 to 2014,and do the horizontal comparison between return on capital in financial sector and other returns in the real economy.Through the data,we concludes the following phenomenon:(i)return on capital in financial sector shows an overall upward trend;(ii)return on capital in financial sector was always higher than return on capital in industrial sector,and the difference,that is,relative return in financial sector continues to expand;(iii)after the global financial crisis in 2008,return on capital in industrial sector shows a downward trend,while return on capital in financial sector rose dramatically;(iv)return on capital in financial sector and changes in real economic growth show a significantly distinct trend;(v)since 2000,investment scale in financial assets engaged by non-financial corporations was continually rising,and its yield is much higher than the yield in real economy.Chapter 4 analyze the direct reason why relative return in financial capital increase continuously.By constructing an equilibrium model with firms,financial sector and households,I discover the relative constitution of financial capital(defined by ratio of equity capital between financial intermediaries and non-financial firms)and the relative return in financial sector have a stable equilibrium.When a series of external factors make the steady state of the relative constitution of financial capital rising,and other factors hinder its real value to convergent to the rising steady state,a positive relative return in financial sector could be maintained or increased.Further analysis shows the five direct reasons are:(i)financial barriers impede free flow of factors;(ii)leverage of financial intermediaries increased;(iii)financial intermediaries' monopoly and interest rate distortions impede market price adjustment mechanism;(iv)effective amount financed declined;(v)distribution effect of the asset price bubble maintained income of financial intermediaries.Chapter 5 further explore the fundamental reason that led to rising relative return in financial sector based on the conclusions of the model.(i)Investment-driven economic development.Government led investment projects are mostly dependent on the financial support of financial system,resulting in the rapid growth of financial capital and leverage in financial sector.The sectors allocated with new financial capital have relative low economic efficiency,resulting in financial capital misallocation.With the accumulation of capital,the marginal efficiency of capital will continue to decline,so new financial capital marginal efficiency also continued to fall.(ii)Complete credit monetary system.The collapse of the Gold standard system and Bretton Woods system,allow money supply to exceed the objective technical constraints,leading to foundation of rapid growth of financial capital.The essence of deposit money creation is the simultaneous increase in loans and deposits,the broad money supply growth drive the increase in leverage of financial sector.The excess money supply causes general price increases,as well as asset prices,leading to the asset price bubbles.(iii)Logic of financial capital.For reasons of national security,the government implements a strong banking sector regulation and set barriers to entry,to ensure the stability of the financial system and the national economy.The effect of scale economy for financial capital prompts the finance industry to form a natural monopoly.The liquidity and speculative of financial capital prompts the formation of an active capital market,which allow the asset price bubble to form.Asset price bubble has a significant allocation effect,so that the investors who grasp more capital,more technology and more information on will obtain a high yield,while the medium and small investors suffered huge losses.Chapter 6 analyzes the impact of rising return on capital in financial sector on economic financialization and economic hollowing.By constructing a dynamic stochastic general equilibrium model that incorporates heterogeneity enterprises with different degree of risk and patience,as well as the bank's capital adequacy ratio constraint,I analyze the short-term and long-term impact of the rise in return on capital in financial sector separately.In the long term,the return on capital in financial sector will stimulate the banks to set more discriminatory loan to value ratios,enabling the size of informal financial market,thereby the total financial assets increased,meanwhile worsening the degree of economic hollowing-out,leading to rise in asset prices and slight decline in total output.In the short term,the rise in return on financial capital caused by tight monetary policy is associated with fall in output.Chapter 7 analyzes the impact of rising return on capital in financial sector on economic growth.By constructing 1989-2011 transnational panel data in 94 countries,two-stage system GMM estimation reveals that(i)relative return in financial sector and economic growth show an inverted U-shaped relationship,which means the per capita GDP growth rate is highest when the return on capital in financial sector and real sector tend to be equal;(ii)financial development is an important pathway for relative return on financial capital to promote economic growth,and when controlling tis pathway,rise in relative return on financial capital will hinder economic growth;(iii)further mechanisms test shows that the relative return financial on capital hinder economic growth by weakening the financial function.Chapter 8 concludes the article and proposes the policy recommendations.In the modern market economy,the financial capital presents a new feature: It has a "leading role" for economic development,but in the case of poor management,financial capital may also become a "double-edged sword".On the one hand,it promotes economic development by promoting physical capital accumulation.On the other hand,it improves the economic uncertainty and the industrial distribution of the real economy,and expands the gap between the rich and the poor.The investment driven economic development mode leads to the distortion of financial capital allocation,and the logic of financial capital makes the economy growing financialized,virtualized and hollowed.Financial capital is only the most favorable to economic development when the capital gains the equal rate in financial sector and real sector.Based on the above conclusions,this paper puts forward the policy recommendations:(i)the government should change the way of economic development,shift to innovation driven economic development,and improve the efficiency of investment;(ii)attach importance to the development of the real economy and increase the income of the industrial capital;(iii)improve the financing function of the capital market,especially equity financing,focus on cultivating rational long-term investors;(iv)encourage and guide the development of private banks,the establishment of a multi-level banking system.