Analysis Of Financial Deepening In China

McKinnon and Shaw first offered the term "financial deepening" in 1970's, which refers to carrying out liberal policies--with interest rate liberalization as the kernel—to diminish the phenomenon of financial depression that existed in the developing countries. In this way, the development of finance and that of economy might be compatible so that a desired economic growth could be expected.The author of this paper holds that McKinnon and Shaw's theory cannot meet the need of financial reform in the developing countries. In essence, money and banking belong to the category of social institution arrangement, and according to game theory, when an institution cannot meet the need of man's senses, it will probably come to an end. The solving of this problem lies in the design of a mechanism in which any individual as well as collective rationalism can both be taken into consideration.In China, the financial depression is born with the wealth distribution by the government. This forms a transitory stage in which the governmental interference has not been withdrawn from the operation of national economy. This brings about lots of rent-seeking activities and the lack of stimulus to vitalize state-owned economic sectors. Therefore, the only way out is to establish a limited government, to cultivate the true sense micro-economic entities, and to introduce incentive into the economy. Thus, the root of financial depression could be extinguished, the financial liberalization could be realized, and a compatible relationship between financial development and economic growth could be expected.In this process, the liberalization of interest rate is just a necessary condition to China's financial deepening, but not a sufficient one. The author of this paper defines financial deepening as series of actions that will entail compatibility in terms of financial and economic development.This paper consists of six chapters. The main contents are as follows:Chapter 1. Theoretical retrospect of functions of financial systemChapter 2. Theoretical retrospect of functions of financial system: China's case since 1949Chapter 3. Present-day China's financial system operation: problems foundChapter 4. Analyzing China's financial depression based on neo-institutional economic theoryChapter 5. Positive study of financial system's efficiency and function of ChinaChapter 6. Summary and suggestions...