Effect Of Financial Development On Capital Formation Mechanism Analysis And Empirical Study

Investment, consumption and net exports are three driving forces of a country’s economic growth. Capital formation, as main impetus of economic growth, has aroused the attention of people since the age of Adam Smith, while financial development has become new and booming research direction only in recent decades. Financial development affects economic growth by two ways such as promoting capital formation and innovating technology. The core of this paper is to find how China’s financial development influence capital formation, to what extent are various elements of the financial development related to capital formation and how to promote capital formation by promoting financial development.Firstly, the author reviews correlated theories about financial development and capital formation in the second chapter of this paper. And then, the author analyzes the mechanism of how financial development influence capital formation. On savings mobilization, financial development increase savings by psychological factors, convenience and profitability. On investment incentive, financial development increases investment by reducing financing costs, providing reliable sources, reducing investment risks. On facilitating the conversion of savings into investments, financial development improves the conversion efficiency through communicating conversion channels, creating conversion needs and increasing conversion efficiency. And then the author empirically have research on the relationship between financial development and capital formation by dividing the country into eastern, central, western regions and selecting financial deepening, financial efficiency and financial structure as indicators, which are the three indicators of financial development.In the part of conclusions the author thinks that financial development influence capital formation through savings mobilization mechanism, investment incentive mechanism and the mechanism of conversion from saving to investment. There is relationship between financial development and capital formation, and the same indicator influence differently to capital formation in different regions. But it is certain that financial development contribute to the capital formation. The advices as follow:First, to distinguish the boundaries between the government and the market, reduce government’s intervention in the financial development; Second, distinguish between financial development in each region, give more autonomy to local government. Third, promote market-oriented interest rate reform. Fourth, encourage financial innovation, build a multi-level financial system.