The Relation Between Financial Development And The Allocation Of Capital And The Demonstration Analysis In China

Financial development appears to improve the allocation of capital. Those with developed financial sectors increase investment more in the growing industries, and decrease investment more in their declining industries, than those with undeveloped financial sectors. The efficiency of capital allocation is positively correlated with the level of financial development. This paper evaluates the empirical relation between the level of financial development and (i) the level of private savings, (ii) the translation from savings to investment, (iii) the efficiency of investment. We find that the allocation of capital will positively increase with the development of financial sectors in China. But the leading mechanism of financing in China is the banks owned by state, which leads to the (1) negative gap of capital and (2) lending bias. They are restricting the allocation of capital in China and may disturb the Economic growth.At the first part, I introduce some famous theories about financial development and economic development, second I make a particular recommendation about the theories of Goldsmith (1969), McKinnon (1973), Shaw (1973). At the second part, I explain the intension and extension about the Capital Allocation, analysis the relation between the financial development and the capital allocation, and put forward the theory structure of this paper at the base of the classic theories.Third, Based on the theory structure advanced I evaluate the empirical relation between the level of financial development and (i) the level of private savings, (ii) the translation from savings to investment, (iii) the efficiency of investment in China. I find that the financial development can assuredly promote the capital allocation in China.Finally, I analyze the reason of capital negative gap and use a simple model to simulate the mechanism of the lending bias. Then with such analysis I can make some policy advice about optimizing the capital allocation and forecast the long trend of the financial development in China. I conclude that setting up mechanism of financing leaded by market is key to optimize the capital allocation.