A Study On The Impact Of Financial Structure On Excess Capacity

Although the central government keeps introducing governance policies to resolve excess capacity since this overcapacity issue emerges in China,the effect is not as desired.Duplicate constructions and reckless expansions are common in industries already suffering from overcapacity,and excess capacity gradually spreads from traditional sectors to emerging sectors.Considering capital allocation efficiency of a country directly affects the excess capacity of this country,China's persistent overcapacity fully reflects the inefficient capital allocation of this market.As capital allocation is a main function of financial system,and financial structure is the carrier of financial development,therefore in a country financial structure can directly affect capital allocation efficiency.China's financial structure is considered to be bank-based because China's social financing is dominated by indirect financing normally referring to bank credit,and direct financing accounts only for a small proportion of total social financing.However,the allocation efficiency of bank credit is rather low in China.Hence,this paper proposes that China's capital allocation efficiency is highly likely to be constrained by the “double weak” financial system with “double weak” referring to weak direct financing and weak indirect financing.Based on the above considerations,this paper attempts to study the causal path among financial structure,capital allocation efficiency and excess capacity,particularly to study whether financial structure can influence excess capacity through capital allocation efficiency.The "dichotomy" financial structure theory divides financial structure in the world into two categories,market-based financial structure dominated by direct financing and bank-based financial structure dominated by indirect financing.According to recent researches,the global financial structure evolves towards market-based direction.This paper intends to verify this evolutionary trend and its impact on capital allocation efficiency,in order to propose mitigation solutions towards China's persistent overcapacity from the perspective of financial structure and capital allocation efficiency.The main research works of this paper are as follows:First,this paper constructs theoretical models to demonstrate that financial structure influences excess capacity through capital allocation efficiency.Specifically,providing that market-based financial structure has the advantage of market information efficiency over bankbased financial structure,by developing “two-sector output growth model with nonovercapacity firms and overcapacity firms as the two sectors” as well as “intertemporal consumption model with investors and producers included”,and providing that market-based financial structure has the advantage over bank-based financial structure of allocating more capitals to high-tech R&D project which has higher risk but higher capital output efficiency,by developing “endogenous growth model with horizontal technical innovation and with financial sector included”,this paper demonstrates that market-based financial structure is more conducive to improving capital allocation efficiency and thereby alleviating excess capacity.Secondly,from the international perspective,according to the worldwide data of financial development indicators and listed companies,this paper empirically examines the causal mechanism of financial structure,capital allocation efficiency and excess capacity.In particular,it constructs financial structure index to measure the ratio of development level of a country's financial markets to development level of the country's financial intermediaries.Meanwhile,it employs financial index analysis,stochastic frontier production function model as well as principal component analysis to construct excess capacity index to measure the extent of firmlevel overcapacity.Based on the modeling idea of Wurgler's(2000)capital allocation efficiency model,this paper constructs both “elastic coefficient of investment to excess capacity index” and “elastic coefficient of financial resources inflow to excess capacity index” to measure capital allocation efficiency of a country.Using obtained financial structure index,capital allocation efficiency index and excess capacity index,this paper then constructs a mediation model and employs “Causal Steps Approach” as well as “Bootstrap Approach” to verify the mediating effect of capital allocation efficiency on the relation between financial structure and excess capacity.This paper finds that evolution of financial structure of a country towards market-based direction can improve capital allocation efficiency,and improvement of capital allocation efficiency in turn alleviates excess capacity in this country.Moreover,this paper asserts that along with global economic and financial development as well as financial innovations,financial structures of countries around the world are very possible to evolve towards market-based direction in the future.Thirdly,from China's perspective,this paper then uses the data of China alone to measure financial structure index,capital allocation efficiency index and excess capacity index,and to test the causal mechanism of these three variables.The results of empirical tests indicate that in China,evolution of financial structure towards bank-based direction can improve capital allocation efficiency,which in turn alleviates persistent overcapacity.Finally,even though no matter to the worldwide or to China alone,financial structure can impact excess capacity through capital allocation efficiency,but contrary to the result of the worldwide sample,evolution of financial structure towards market-based direction in China will reduce rather than improve capital allocation efficiency.To explain the difference in results between the world sample and the China sample,this paper conducts further empirical tests and finds that the abnormal performance of China on the causal relation between financial structure and capital allocation efficiency is probably constrained by China's relatively low level of economic and financial development,and by China's relatively high level of financial structure index which is probably caused by China's backward financial intermediaries.According to all the empirical results,at present,it is not suitable for China which is now in the stage of economic transitions and which has a "double weak" financial system to stride its financial structure towards market-based direction,because it possibly will not only reduce capital allocation efficiency in this market,but also aggravate China's persistent overcapacity.However,in the future as long as the economy and finance of China develop to a higher extent,along with a sound and well-functioned legal and financial system,evolution of financial structure towards market-based direction in China will eventually be beneficial to improve capital allocation efficiency,which in turn effectively prevents and resolves excess capacity.More importantly,rather than adjust financial structure to be market-based,China at present should give more priorities to solving the main problems of the current financial system.To deal with it,this paper makes specific policy recommendations on some of the problems revealed and discussed in this paper.