Study On The Relationship Between Monetization Of Assets And Economic Growth In China

After Goldsmith, Raymond�' W created the theory of financial Development, Ronald�'I�'Mckinnon and Edward�'S�'Shaw created the theory of financial deepening in 1973, they took the developing country as object of study mainly. Since they were influenced by liberalism thought, specifically for the developing country whose financial is constrained, Ronald I. Mckinnon and Esward�'S�'Shaw proposed that the developing countries should abrogate the policy of the financial recommendations, relax the interest rate control, control the inflation and make the interest rate can reflect the demand of funds. When real interest rate is positive, the financial system can gather the more financial resources, play the financial functions and improve financial efficiency for stimulating economic growth.Is there is a relationship between the level of financial deepening and economic growth? This argument attracts a lot of scholars to have brought forward their viewpoints and have carried out demonstrations. The results of the study probably proved that there were the two-way causal relationship between the economic growth and the national finance deepening level. Many Chinese scholars also carried out measurement of Chinese financial deepening level for promoting Chinese economic growth.When they measured Chinese financial deepening, a lot of scholars adopted the indexes FIR which was brought forward by west scholars. Further more Mckinnon and Esward�'S�'Shaw had simplified this index into M2/GDP which was approved and applied broadly.But when we use FIR and M2/GDP to measure the Chinese financial deepening, they are not rational. Chinese M2/GDP is bigger than all the developed countries, but in fact Chinese financial system in the same term can not compete with these developed countries'. And at the same time FIR is not so bigger than other's.We must base on the real situation of China, so in the first part of the second chapter of this paper we advance a new index to measure Chinese level of financial deepening-monetization of assets. Tobin writes in his book named of《Money, Credit and Capital》: The financial market and the intermediaries in the market make the capital having a character of money. In the financial market, financial assets could be considered capital which is like money, and have a character of flow. It is a process of financial deepening. Therefore, monetization of assets means a ratio of financial assets to social assets. The process of monetization of assets can describe the process of financial deepening. So the index p (financial assets/social assets) is suitable to measure the level of financial deepening, it can deeply reflect on the relationship between the level of financial deepening and economic growth.The method of measuring the level of monetization of assets is below:First, we define the financial assets as the sum of M2, stock market value, bond assets and insurance assets.Secondly, we measure the social assets based on the theory of the Tobin'q. Assets'price is determined by the anticipation of income of assets. Supposed that financial market is equilibrium (q=1), replacement cost of assets is equal to market price.We take Solo's model to estimate the social assets.From the Solo's model, scale remuneration unchanged means: total revenue of production factor is equal to total output. Y_t = K_t F′( K_t ) + L_tF′(L_t) K_t = (Y_t - L_tw) /rBased on the study above, we gained a conclusion that output is composed of contribution of capital and labor under the case of scale remuneration unchanged. The sum of output contributed by labor and output contributed by capital is social total output. We can estimate the social total assets with the assets return rate. Under the equilibrium the marginal rate of capital return is the natural rate which is written in《Interest and Price》.Through the equation of K_t = (Y_t - L_tw) /r we can estimate the social total assets.Now we can calculate p by financial assets/social total assets.We use the index of monetization of assets to measure Chinese financial deepening in the second part of the second chapter. Among calculating assets monetization, we choose some data which we can get to substitute that we can not get, Real interest rate substitutes natural interest rate, R_实=R_名-π, and total wages on duty of the statistical yearbook substitutes labor output. The result that we calculate indicates that the monetization of assets in China rose quickly before 2000, then it has a low-speed because of downturn of stocks, and in the year of 2005 it back up a little. Compared with Tobin's measured index of monetization of assets of America, our country's monetization of assets is not enough, Chinese financial deepening should be strengthened.In next chapter, we use the indexes which were grouped by Edward�'S�'Shaw with the new data to measure Chinese financial deepening level, so we can study the Chinese level from every side.At the last chapter, we introduce some theories of the relation between financial deepening and economic growth firstly, and then we have a Granger cause and effect empirical. From the empirical we have the equation of monetization of assets. From the result of empirical, we have a conclusion that the monetization of assets has a Granger effect to GDP growth rate and GDP growth rate have a Granger effect to the monetization of assets. we can not know the function of the monetization of assets and economic growth, but we know the conclusion is that there is a mutual effect between financial deepening and economic growth, we must continue to study the relationship hardly in the future.