A Study On The Relationship Between International Capital Inflow And The Development Of China's Financial System

With the development of the financial globalization, international capital flow becomes more and more frequent. Many economists domestic and abroad have deeply analyzed the relationship of international capital flow and economic growth. The international capital inflow, especially the international financial capital inflow absolutely affects the financial system of the host nation. However, few economists analyze the relationship between the international capital inflow and the development of the financial system, while the design of this paper is based right on this point.There are in all six parts in this thesis. The first part is the introduction, including the background and significance of this paper, the research ideas and methods of study.The second part is literature review of the international capital inflow and the development of the financial system, including the theoretical analysis and the empirical analysis. The theoretical part includes the international capital inflow and the development of the financial system into the theory of the financial instability, the financial deepening, the financial liberalization and financial restriction. The empirical part introduces the actuality of the domestic and the overseas analysis. Some economists think that the international capital inflow has positive effects on the development of the financial system while others believe that there are some negative effects. Otherwise, the former empirical analysis mainly focused on the influencing factors of international capital inflow. What's more, they regard the international flow as the cause of the financial crisis. However, the former empirical studies were most analyzed from the effect factors of the capital inflow, and made some key index as the factors, so that they couldn't get an overall research on the relationship between the international capital inflow and the development of the financial system. Generally speaking, the generation of the positive effects of their relationship has some conditions, which can be named as the effect factors between the international capital inflow and the development of the financial system.The third part makes a detailed analysis on the influencing factors, including the macroeconomic status, the development of financial system and the development of the financial supervision system. Besides, this part also makes a further decision of these factors and discusses the influences on their relationships.The fourth part mainly analyzes the China's present reality of the international capital inflow and the development of financial system. Firstly, it introduces the amount and the structural change of the China's international capital inflow. To sum up, the mode of the international capital inflow to China is mainly non-FDI. Then it analyzes the China's present reality of the international capital inflow and the development of financial system, including the developing courses of the China's financial system, the reform of its financial institution, the circulation of the market, the development of the financial supervision system and the openness of the financial system. At last, it explains the problems about international capital inflow and the development of China's financial system. They exist in the financial institution, the financial market and the supervision. We can surmise that international capital inflow affects the development of the financial system in China while the latter affects the former at the same time.The fifth part is the empirical analysis. The thesis establishes a model to study the relationship between the international capital inflow and the development of China's financial system. The model chooses four indexes. They are China's international capital inflow, the money supply, the difference of the interest rate between China and America, and the exchange rate, and the time is from 1985 to 2006. Then it uses ADF to test the data series. Based on this test, we use the co-integration test to find that there is a long stable relationship between the international capital inflow and the development of the China's financial system. Then the paper uses the Granger Causality Test to test the causality of the two indexes. There are several results. First, international capital inflow doesn't granger cause money supply. That is the increase of money supply will not bring the growth of the international capital inflow. Second, to some extent, international capital inflow granger causes the exchange rate. Namely, the change of the exchange rate will affect international capital inflow, and the effects of the international capital inflow to Chinese exchange rate are not significant. This is decided by the China's exchange rate system. Third, the international capital inflow doesn't granger cause the difference of Chinese and American interest rate. On the one hand, it is caused by the selection of the data. On the other hand, it is caused by the Chinese official interest rate. In order to analyze the short-term relationship between the international capital inflow and the development of the Chinese financial system, this thesis establishes the VEC. The findings of the empirical study proves that the international capital inflow has a significant impact on the development of the China's financial system, but the development of the financial system doesn't have a significant impact on the international capital inflow. This is decided by the development status of the financial system, for its many deficiencies. The factors which affect the international capital inflow and the development of China's financial system are to be improved.On the basis of the above analysis, the sixth part put forwards some political recommendations about the international capital inflow and the development of financial system in China: First, deepening the reform and opening China's financial system, and gradually to establish a market-based financial system. Second, improving financial supervision and guiding the international capital to flow reasonably. Third, following the financial sustainability and trying our best to integrate into the international community and take part in international economic coordination activities. Only by the concerted efforts of the various sectors of our society, China's financial system can achieve a sustainable development.