Research On The Relationship Between China's Financial Development And Economic Growth For The Past 5 Years

Significant improvements have been achieved in the opening up process in China's financial industry ever since China's entry to the WTO for the last five years. During this time and with China's opening up, more and more foreign financial institutions already have and are participating positively in China's economic and financial life though their unremitting efforts. After 20 years of reform and opening up, China's economic and financial development practice shows that finance has become the heart of the distribution of resources, the macro-control center and the core of the country's economic security and stability as well. Financial development has become the indispensable prerequisite for the development of a modern market economy.The history of the development of the world economy has repeatedly proved that financial restraint or excessive financial would damage economic growth. In order to achieve sustained, rapid and healthy development for China's economy during this transition period, we have to correctly handle the relationship between financial development and economic growth, establish a modern financial system that is compatible with the rapid economic growth. This is not only vital to the reform of the financial system, but also to the entire economic system, especially during this crucial period of economic growth, social transformation and the development of the country. So, deep studies on the theory and practice of this issue is of particular importance.This paper followed the Chronological order of five famous large context of the debate on monetary issues that happened in the history of Western economics and take a brief carding over the western economics before the 60s in the 20th century on the relationship between the financial development and economic growth. During late 1960s to early 1970s, some economists published a number of economists to study the economic development and financial development as the main content of monographs, represented by Goldsmith, Gurley and Shaw, McKinnon. The Financial development theory was founded then. After that, based on the new Keynesian analysis, Stiglitz summarized the reasons for the failure of financial markets. In his opinion, the government should take indirect control over the financial market supervision mechanism and establish the scope of supervision and regulatory standards based on certain principles.On this basis , Hellman, Murdock and Stiglitz raised the theoretical analysis framework of the financial constraints in "financial constraints -A new analytical framework" . In the 1990s , based on the endogenous growth theory, economists used the growth regression method to establish a large number of theoretical models and explained the endogenous formation of a financial system and how the financial system affects the economic growth. In order to test the relationship between financial development and economic growth after China's entry to the WTO, this paper has constructed indicators that can reflect the level of China's financial development, financial depth, BANK and EQUITY. BANK=Bank loans/ (Bank loans +Domestic assets held by the Central Bank) and EQUITY=Average stock market value/GDP. Based on the theoretical relationship between financial development and economic growth, we used the data since China's entry to the WTO till now (that is, the first quarter of 2002 to the third quarter of 2006) to build an Overall analytical framework and econometric Model, empirically studied various economic variables' impact on economic growth, processed the qualitative and quantitative analysis on the important role the progress in the development of the financial industry has played in China's high economic growth. The results showed that:1. The financial depth indicator has a positive effect on China's economic growth rate. However, the results are not significant statistically, it also can be seen that this positive influence is very weak or not.2. Banks and other financial institutions have a negative effect on the nation's economic growth and it's significant statistically. Non-bank financial institutions have a positive effect on China's economic growth and it's significant statistically.The year 2007 is the first year when the transition period ended after China's entry to the WTO. The competition will become fiercer and fiercer in all China's industries, especially in banking and other key industries. The impact of foreign capital will increasingly become stronger and stronger. The author of this paper made some understandings and points on the functional supervision, and financial innovation under it.