Financial Globalization and the Development of China's Economy

Financial Globalization and the Development of China's Economy

Zhao Weili (Southern Federal University, China)
DOI: 10.4018/978-1-7998-4459-4.ch013
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Abstract

Since the outbreak of COVID-19, the official Brexit and the trade friction between Sino-US, anti-globalization become the focus of the world. After 40 years of reform and opening up, China's economy is facing new challenges under the new world situation. This chapter mainly focuses on how to promote China's economic growth under the background of financial globalization. Firstly, this chapter will introduce the development trend of the globalization and analyze the relation between financial globalization and economic growth. Secondly, this chapter will examine the state quo of China's financial openness and compare the change of China's de jure financial openness with the change of China's de facto financial openness. At last, this chapter will expound challenges faced by China's economy and put forward possible solutions to these challenges in terms of financial globalization.
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Background

In academic research, the impact of financial integration on economic growth can be roughly divided into three categories: promotion theory, conditional theory, and irrelevant theory.

Bekaert, Harvey and Lundblad (2003) believe that the integration of equity markets is conducive to reduce the cost of capital, so it makes sense that a lower cost of capital is associated with increased investment and better prospects for GDP growth. Quinn (1997) finds that financial opening can promote the efficiency of capital allocation. So, it is robustly and positively associated with economic growth. Vanassche (2004) concludes that financial integration not only enhances growth of industries, but also promote the development of the domestic financial system.

Edwards (2001) finds that financial opening can inhibit the economic growth of poor countries but promote the economic growth of developed countries. Edison et al. (2004) believe that capital account openness and stock market liberalization are in favor for economic growth in middle-income countries, not for economic growth in poorer or richer countries. So, they think financial integration is conditional for economic growth.

Different from the above viewpoints, Kraay (1998), Rodrik (1998), and Durham (2004) do not find relevant or causal link between financial integration and economic growth.

In recent years, studies of the effect of financial integration on economic growth can be found in the works of Ghazouani (2019), Md Saifur and Farihana (2019), Fabio et al (2019), Inekwe and Valenzuela (2020), but all these studies concentrate on the impact of financial integration on one aspect of the economy, not on the overall economy. Although Taghizadeh-Hesary et al (2019) and Muazu (2020) have noted threshold effect of financial integration, but they explain it from the empirical analysis, not from theoretical analysis.

On the basis of these researches, this chapter points out that there are cost in financial opening, and the different impacts of financial opening on economic growth are caused by the different cost of itself. From the perspective of marginal benefit and marginal cost, this chapter analyzes that only under the specific social basic conditions, the marginal benefit of financial opening is greater than the marginal cost. But different countries have different social basic conditions at different periods, so the cost of participating in financial globalization is different too. Researchers choose different countries and periods as samples, so they will get different conclusions. That is the reason why scholars form different views before.

Key Terms in this Chapter

Financial Development: The continuous improvement of financial efficiency brought by the expansion of financial transaction scale and the process of financial industry upgrading. It is reflected in the elimination of financial repression and the improvement of financial structure, the innovation of financial instruments and the diversification of financial institutions to adapt to economic development.

Financial Opening: The process of deregulation of domestic and foreign financial institutions, deregulation of exchange rate and interest rate, deregulation of foreign exchange, and integration of domestic financial markets and institutions with international financial markets and institutions.

Threshold Point: A critical point, only when an economic factor is beyond this point, it can have an influence on another economic factor.

Opportunity Cost: The cost incurred by not enjoying the benefit associated with the best alternative choice. It can be the other opportunity given up when engaging in another activity or the other income given up when a certain resource is used to obtain another income.

Marginal Benefit: The increase of output caused by one additional unit of input.

Externality Cost: A cost that affects a third party who did not choose to incur that cost.

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