Financial Deepenning, Capital Deepening And Fiscal Decentralization

This paper mainly investigates three problems:①Why isn't there a descending tendency of financial deepening while the constitutional force has been declining since 1990s? What are the factors attributing to financial deepening?②Are there any inner relationship between financial deepening and transitional deepening of capital which appeared in 1990s? If yes, what are the transitional devices between this double deepening?③what are the profound economic and systemic factors beneath this double deepening? Three basic hypotheses are proposed in this research after empirical observation of this double deepening.The endogenous hypothesis of financial deepening offers the answer to the first problem:Financial deepening results from a lagged and passive choice of capital deepening rather than resulting from neither active choice of policies nor the monetization process during the non-transitional period. Capital investment needs to ground in financial channels which are limited by the universally carried out policy of financial restraint in China to such an extent that disable investors to acquire enough capital. Thus subject of economy has to rely on inner financing channels. So financial deepening results from the accumulation of willing capital.Meanwhile, accumulation of financial assets enables capital accumulation by"channel effect", resulting in a possibility of capital accumulation (mutual compensatory hypothesis). By the common functions of endogenous hypothesis and mutual compensatory hypothesis, the special phenomenon of double deepening can be observed to reveal a high-ranked consistency and correlation between capital deepening and financial deepening.While capital deepening attributes to financial deepening, what are the reasons contributing to capital deepening? The third hypothesis we proposed argues that fiscal decentralization devices is the basic reason for double deepening. In order to win out for promotion in achievement competition within the overall distorted motivational devices, local government officials dispense large-scale fiscal budget to carry through repeated and blind infrastructure construction as well as industry sustaining policies with characteristics of protectionism. As a result, massive low-efficient capital emerges and worsens the double deepening.