Correlation Of Financial Development And Economic Growth And The Financial Risk In China

A concise introduction of voluminous classical literature on the correlation of financial development and economic growth is firstly made from both theoretical analysis and empirical study. Theoretically, through its five functions, improving the allocation of capital, improving the management of liquid assets, monitoring the managers and implementing corporate control, mobilizing savings and facilitating transaction, how financial system promotes economic growth is examined from the perspective of trade cost and information cost; empirically, both cross-country and single-country achievements are described with a stress on the cases of single countries and China. Subsequently, the history of Chinese financial development is reviewed since the implementation of reform and open policy. The three quantitative indicators and the three qualitative indicators, as proxy for financial development, show that financial development lacks efficiency in China. Combining the academic achievements from home and abroad and the status quo of China, a demonstration test, in the framework of two-sector model, is conducted of Chinese financial development and economic growth. The test shows that the supply-leading version is prevalent, though both are mutually facilitated. Enlightened by financial crises worldwide, there are some tips for China: improving the information disclosure of financial institutions and enterprises to achieve the effective financial regulation, expanding the floating range of RMB exchange rate to dilute the exchange rate risk owing to the productivity difference between foreign countries and China, basing monetary economy on real economy to repress bubble economy. Finally, the paper discusses the conditions of internal financial risk in China, and points out the nonperforming assets of banks to be the most critical financial risk, and then explores the reason in the method of the game theory, and concludes that the soft budget constraint faced by Chinese state-owned enterprises is the answer of the problem. It is suggested that the relationship between the government, banks and state-owned enterprises be handled properly, with less governmental intervention and reform of banks property rights.