Comparative Analysis Of Financial Deepening And Economic Growth Between China And Korea

As the gradual deepening of economic mechanism reform in China, finance has became one of the last fields not totally market-based; while the market reform needs desperately the reform of financial deepening. We can carry on systematic research on the existing international financial deepening theory, learn from other countries'financial deepening experiences, and study our country's financial deepening processes, so as to offer experience and lessons for reference to the process of financial deepening in China from theoretic and practical respects, prevent financial crisis during the process of financial deepening, push and guide the further financial deepening in China's, and promote further economic growth of China through financial development. This paper tries to explain the financial deepening process in China and Korea by comparison.Based on the experiential analysis on the "financial repression" of developing countries from different angles, two American economist, E·S·Shaw and R·I·McKinnon, put forward the policy of "financial deepening" in 1973. They believed financial liberalization and deepening can promote the stable growth in output and employment, cause the rise of marginal ratio of output-input, and help make the income distribution equal.There is a mutually stimulating, interactive relationship among a country's financial system, financial development and economic development. But in developing countries, financial development and economic development are in a vicious circle; backward financial system can not help the economic growth; and a sluggish economy will hinder the development of financial sector. The vicious circle in developing countries is generally due to the "financial repression". An effective way to correct "financial restraint" is to achieve "financial deepening"--refers to the government gives up excessive interference and control on financial markets and financial system; makes the changes in interest rate and exchange rate a complete reflection of the supply and demand of foreign exchange and capital and the inflation controlled effectively; ensures the financial system, especially the banking system, is able to attract a lot of savings with a suitable interest, meanwhile meets the money needs of real economy sectors at an appropriate interest rate level of loans; refers the specialization of financial functions and financial institutions, and organized domestic financial institutions and market can get benefits during their communication with foreign markets and the OTC market.Contrary to financial liberalization theory, the financial constraints theory was putted by Stiglitz and others, through the dialysis of the theory that is easy to view as the preparations the economic development and finance development does not reach a certain level in a country. So these two theories are in the same way of financial deepening and both aimed at promoting economic development and financial development of a virtuous cycle.From 1950s to 1970s, although South Korean's financial sector experienced "repression", the growth of total financial assets had rapidly grown up, known as the typical developing country. In this context, in the later of the 1970s, South Korea began the liberalization of the financial reform, which is very difficult to Korea for the financial restriction policy in Korea for about twenty years .In the 1980s, the financial liberalization strategy had changed to the government's indirect monetary control. Through privatization and liberalization of commercial for the transition banks and market-oriented interest rates, the financial market had improved. The Reform of the financial liberalization in the 1990s had overcame the limitations of the past and implement reforms in the financial sector ,and on the basis of the change the reform had further improved. The liberalization of interest rates started in 1991.The new amendments to the financial institutions industry and the business scope ownership structure and the improvement of the financial infrastructure had laid the foundation for the realization of the modern financial industry.In 1997, Korea's economy had been badly hitted from the Asian financial crisis. Facing to the financial crisis , Korea had been following the International Monetary Fund (IMF)'s advice, which is a package of proposed measures .Then South Korea began a full-scale financial reform. President Kim promoted the market-based mechanism for financial institutions, the enterprises reform, the resume of its functions, the credit assessment and the risk management of financial institutions in order to enhance the capacity of the financial supervision, to improve the operational efficiency and the stability of the financial system. From the view of financial deepening, although there was the impaction of the financial repression in South Korea's financial sector, Korea still achieved the growth of the financial assets. The finance rate raised from 2.75 in 1975 to 6.95 in 2000.The M3/GDP ratio went to 174.6% in 2000,which is 38.1% in 1975 . Financial liberalization has also profoundly influenced the behavior of financial intermediation. The policy-oriented loans at the rate of domestic credit dropped significantly from 47% in 1980 to 25% in 1991. This shows that the financial intermediary for the state reduces in the allocation of credit, the financial institutions and the overall business conditions have improved, the bank's asset structure, the rate of return has been optimized and improved. Therefore, the financial institutions improved its safety and ability to resist risks particularly. South Korea's financial liberalization of the financial markets, financial system and monetary policy has undergone profound changes.Compatible with the economic development entities, the development of China's financial system followed the pattern of Soviet Union. There was a highly centralized financial system, financial management plan and using administrative means. In the financial structure, financial aggregate was due to the economic field for smaller entities, corporate finance, extremely single the financing structure. After reform and opening up, China has gradually established a diversified financial system, and the financial sector has developed rapidly.In 1978, the total capital for financial institutions was 187.7 billion RNB, the deposits totaled 113.4 billion RNB, also the total balance of savings deposits of 21.06 billion RNB. China's financial assets in 2006 totaled 75.4192 trillion RNB. M2/GDP, which reflects the economic and monetary level, especially through the banking system to create a reflection of the relative size of the currency, rose from 0.32 in 1978 to 1.65 in 2006. As the first stage of the process of financial deepening, Finance rate (FIR), which reflects the reality of the use of various financial tools to guide the level of economic activity and also can reflect the overall level of financial development, grew from 0.54 in 1979 to 3.6 in 2006. The ratio of China's financial performance related to the trend of year-on-year increase. This reflects the deepening of China's economic and monetary and financial deepening obviously.After the analysis of China's financial deepening, let us turn to another angle to go on our study .Using the economic model, deepening the role played by China's economic growth, the internationally accepted EViews5.0 data analysis software and the cointegration analysis and Granger (Granger) causality test methods for the growth of the Chinese economy and the deepening of finance, an Empirical analysis of the variables test there is the correlation between China's economic growth and financial deepening.In the process of Empirical Research, with the growth rate of nominal GDP (Modification) to represent the economic growth target, GDP growth of financial assets (LFIR) to represent the financial indicators of 1994~2006 time. China's financial system is divided into two parts: the main financial intermediaries to the banking system, BANK; selected financial intermediary for the contribution of the annual growth rate of Shanghai Composite Index SECG used to the Chinese capital market.We use the first of the unit root test sequence, the sequence of time to test and determine whether or not smooth. ADF was used to test the unit root test sequence. As all economic indicators and financial depth indicator variables are variables I (1) process, its co-integration test. Modification selected, LFIR, BANK, SECG group variable Johansen cointegration test. The results showed Modification, LFIR, BANK, SECG .These variables exist in the 5% significance level one cointegration relationship. On the above sequence indicator variables to select an appropriate time lag for Granger causality test. The results show that financial deepening in China (LFIR) and economic growth (Modification) Granger each other causes; economic growth (Modification) is a financial intermediary development (BANK) and the development of the capital market (SECG) Granger Cause; the development of financial intermediaries (BANK) and the development of the capital market (SECG) is not the economic growth (Modification) Granby - CauseFrom the above analysis we can see that China's deepening financial level is not in line with the level of economic growth. Financial system is still need relatively backward. The economic development needs the financial environment, and the financial environment correspondingly promotes the economic development. This shows that China's financial deepening needs more depth, particularly for the financial intermediary and the capital market reformsThe empirical results confirm our country need more financial deepening and economic growth in order to promote better mutual. Based on the analysis of the comparison in the reform model and the reform content between two countries, we can get more useful experience for our financial reform.