Does financial integration spur economic growth in china the way to be an economic powerhouse

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC MỞ THÀNH PHỐ HỒ CHÍ MINH BÁO CÁO TỔNG KẾT ĐỀ TÀI KHOA HỌC VÀ CÔNG NGHỆ CẤP CƠ SỞ Does Financial Integration Spur Economic Growth in China? The Way to be an Economic Powerhouse Mã số: E.2019.24.3 Chủ nhiệm đề tài: ThS HỒ MINH CHÍ TP HCM, 02/2021 BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC MỞ THÀNH PHỐ HỒ CHÍ MINH BÁO CÁO TỔNG KẾT ĐỀ TÀI KHOA HỌC VÀ CÔNG NGHỆ CẤP CƠ SỞ Does Financial Integration Spur Economic Growth in China? The Way to be an Economic Powerhouse Mã số: E.2019.24.3 Xác nhận tổ chức chủ trì Chủ nhiệm đề tài Hồ Minh Chí TP HCM, 02/2021 DANH SÁCH NHỮNG THÀNH VIÊN THAM GIA NGHIÊN CỨU ĐỀ TÀI VÀ ĐƠN VỊ PHỐI HỢP CHÍNH Chủ nhiệm Đề tài: Ths Hồ Minh Chí Trường Đại học Mở Thành phố Hồ Chí Minh, Việt Nam Thành viên: TS Võ Hồng Đức Trường Đại học Mở Thành phố Hồ Chí Minh, Việt Nam Đơn vị phối hợp chính: Trường Đại học Mở Thành phố Hồ Chí Minh BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC MỞ THÀNH PHỐ HỒ CHÍ MINH THƠNG TIN KẾT QUẢ NGHIÊN CỨU Thông tin chung: - Tên đề tài: Does Financial Integration Spur Economic Growth in China? The Way to be an Economic Powerhouse - Mã số: E.2019.24.3 - Chủ nhiệm: ThS Hồ Minh Chí - Cơ quan chủ trì: Trường Đại học Mở Thành phố Hồ Chí Minh - Thời gian thực hiện: 10/2019 – 4/2021 Mục tiêu: Mục tiêu tổng quát đề tài: Đánh giá lại mối quan hệ tăng trưởng tài thơng qua phân tich chuỗi thời gian Trên sở đó, đề tài đề kỳ vọng đề xuất số gọi ý sách có ý nghĩa cho q trình phát triển nước nhà Tính sáng tạo: Trung Quốc trở thành cường quốc kinh tế đứng thứ hai giới trở thành chủ đề nghiên cứu hấp dẫn vài thập kỷ trở lại Các số thống kê bứt phá vượt trội kinh tế Trung quốc từ năm 1980 Đầu tiên, cải cách kinh tế năm 1979 Trung Quốc tảng cho tăng trưởng mạnh mẽ đất nước từ năm 2000 Vốn nội địa Trung Quốc tăng từ 417 tỷ đô la năm 200 lên đến 5.000 tỷ đô la năm 2015 Bên cạnh đó, vố đầu tư trực tiếp nước ngồi (FDI) Trung Quốc gia tăng từ 68 tỷ đô năm 2004 lên đến 171.5 tỷ đô vào năm 2008 Đặc biệt, năm 2016 đánh dấu lần Trung Quốc đạt thặng dư đầu tư nước Đấy xu hướng cho thấy quốc gia có khuynh hướng mở rộng phát triển đầu tư nước ngồi Các nghiên cứu tài tăng trưởng trước số tác động tài phát triển đến tăng trưởng kinh tế ngược lại Hầu hết nghiên cứu tập trung vào liệu vĩ mô (Anwar & Cooray, 2012; Edison, Levine, Ricci, & Sløk, 2002; Gourinchas & Jeanne, 2006; Imbs, 2006; Kose, Prasad, & Terrones, 2003; Lane & Milesi-Ferretti, 2003; Menyah, 2014) Một số nghiên cứu khác sử dụng liệu thời gian thị trường tài để phân tích mối quan hệ tài tăng trưởng cho quốc gia (Cheung, Chinn, & Fujii, 2005; Girardin & Liu, 2007; Guiso, Jappelli, Padula, & Pagano, 2004; Peia & Roszbach, 2015) Có nghiên cứu sử dụng liệu chuỗi thời gian cấp độ quốc gia chủ đề nghiên cứu (Ang, 2008b & 2010; Anwar & Sun, 2011) Đây điểm nghiên cứu này, đặc biệt mối quan hệ tài – tăng trưởng cấp độ quốc gia Trung Quốc chưa xem xét cách riêng biệt Nghiên cứu mong muốn đóng góp vào sở lý luận mối quan hệ tăng trưởng – tài chính, góc độ phân tích chuỗi thời gian, sử dụng liệu cấp độ quốc gia Trong đó, phương pháp tự hồi quy hạng trễ (ARDL) ứng dụng nghiên cứu để giải vấn để ước lượng chuỗi thời gian với cỡ mẫu nhỏ xác định tồn mối quan hệ đồng tích hợp tăng trưởng hội nhập tài Cuối cùng, nghiên cứu sử dụng số liệu hội nhập tài chính, bao gồm hai định nghĩa “de facto” “de jure”, phát triển Dreher (2006), Dreher cộng (2008), cập cập nhận gần Gygli cộng (2019) Kết nghiên cứu: Nghiên cứu thực nhằm xem xét mối liên hệ tăng trưởng kinh tế hội nhập tài quốc gia đơng dân giới – Trung Quốc Áp dụng phương pháp phân tích chuỗi thời gian ARDL (the Auto-Regressive Distributed Lags) ứng dụng số liệu tồn cầu hóa, chúng tơi tìm số kết sau: - Chính phủ Trung Quốc đạt thành cơng định q trình chuẩn bị cho cơng hội nhập kinh tế tồn cầu, đặc biệt lĩnh vực tài - Nghiên cứu xác nhận có mối quan hệ dài hạn hội nhập tài “thực” tăng trưởng kinh tế Trung Quốc - Mối quan hệ nhân hai chiều hội nhập tài vào tăng trưởng kinh tế Trung Quốc khẳng định thông qua kiểm định Granger Sản phẩm: Kết nghiên cứu đăng tải tạp chí Economies Tạp chí thuộc danh mục ESCI (the Emerging Sources Citation Index) với số trích dẫn 1.6 vào thời điểm tháng 11 năm 2020 Tạp chí thuộc danh mục Elsevier’s SCOPUS (Quarter 2) Hiệu quả, phương thức chuyển giao kết nghiên cứu khả áp dụng: Kết từ nghiên cứu ứng dụng làm nguồn tài liệu tham khảo cho sinh viên đại học, học viên cao học ngành Kinh tế học tham khảo Trường Đại học Mở Thành phố Hồ Chí Minh Nghiên cứu hữu cho sinh viên quan tâm lĩnh vực kinh tế nông nghiệp kinh tế phát triển Ngày 21 tháng 02 năm 2021 Cơ quan chủ trì Chủ nhiệm đề tài (ký, họ tên, đóng dấu) (ký, họ tên) ThS Hồ Minh Chí MINISTRY OF EDUCATION AND TRAINING HO CHI MINH CITY OPEN UNIVERSITY INFORMATION ON RESEARCH RESULTS General Information:  Project title: Does Financial Integration Spur Economic Growth in China? The Way to be an Economic Powerhouse  Code number: E.2019.24.3  Coordinator: Mr Ho Minh Chi  Implemeting institution: Ho Chi Minh City Open Univeristy  Duration: 10/2019 – 4/2021 Objectives: The objective of this project is to examine the cointegration relationship between financial integration and economic growth in China for the period from 1970 to 2015 Creativeness and innovativeness: How did China become the world second largest economy in recent years? Starting from the emerging since middle 2000s, China seemed to safely rise up regardless many global crisis, especially the global financial crisis in 2007-2008 and the world repression in 2010-2012 Since these incredible developments, China has been an attracted investigation for a lot of researchers Chinese market underlined many interested information if we search on its macro data during the two largest global crisis above At first, broad money in China increased from 1979, when Chinese government started to reform the economy Secondly, the domestic capital formation suddenly increased from 2000 (approximately 417 billion USD), and vertically rose up from 2006 to 2015 (around 1.1 thousand billion to around thousand billion USD) Thirdly, FDI flows in China are also notable FDI inflow to China went up from early 1990s with a maintained volume It started huge movements from 2004 (around 68 billion USD in 2004 to 171.5 billion USD in 2008) Meanwhile, FDI outflow from China hidden its play until 2013 Especially, in 2016 China had a surplus from FDI flows in which FDI outflow excessed the inflow by around 41.6 billion USD There is an endless argument on finance & growth nexus Various researches capture different effect of finance on growth There are positive, negative, and irrelevant relations between financial development and economic development reported by numerous empirical works Generally, researches conducted on aggregate level usually investigate in panel data while time-series analysis is mostly employed in micro researches As panel data at aggregate level, previous studies targeted to identify a typical influence of finance on growth or vice versa This kind of research cannot isolate a special case like China in order to shield the light to a particular puzzle The motivation for this study is the rapid development of China in two recent decades We try to shield the light on finance-growth nexus in China, especially the growth effect of financial integration This research try to contribute empirical evidence for the finance & growth nexus under time-series point of view for a single nation at aggregate level, by employing the recent updated data on which is firstly developed by Dreher (2006) Research results: The current research is conducted to explore cointegration between financial integration and economic growth in China We discover serveral findings: - Chinese government has well preparation for the country to integrate with the global economy, especially in the financial sector - The cointegration between financial integration and economic growth exists in China - We find bidirectional causality between financial integration and economic growth in China Products: A paper has been published on Economies This journal is indexed in Web of Science’s ESCI (the merging Sources Citation Index) with the CiteScore of 1.6 as at November 2020 The journal is also indexed in Elsevier’s SCOPUS (Quarter 2) Transfer alternatives, application institutions, impacts and benefits of research results: The findings from the project are a useful informative reference source of information for undergraduate and graduate students, especially in the major of Economics and Agriculre at Ho Chi Minh City Open University Others students who are interested in the field of agricultural economics will benefit from the project too Ho Chi Minh City, 21 February 2021 Implemeting Institution Coordinator (signed, named and sealed) Mr Ho Minh Chi TABLE OF CONTENTS INTRODUCTION 11 LITERATURE REVIEW 13 2.1 GROWTH 2.2 SYSTEM RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC 13 THE ROLE OF INTEGRATION AND LIBERALIZATION IN FINANCIAL 16 METHODOLOGY AND DATA 19 3.1 METHODOLOGY 19 3.2 TIME-SERIES ANALYSIS STRATEGY 19 3.3 VARIABLES AND DATA SOURCES 22 RESULTS 25 4.1 DESCRIPTIVE STATISTICS 25 4.2 CO-INTEGRATION ANALYSIS 31 DISCUSSION 39 CONCLUDING REMARKS 41 REFERENCES 43 models including financial integration de jure Meanwhile, models of financial integration de facto appear to have long-term cointegration relation at 1% of significant level Table presents both long-run and short-run results of the ARDL model In the first two columns, GDP per capita is the dependent variable, while GDP is the dependence in the two models the last two columns FI de jure and FI de facto are key variables in column & 3, and & 4, respectively Table Gregory-Hansen cointegration test Table Cointegration test by ARDL bound test 33 An interest of the results reported in Table is that financial integration especially de facto integration has negative effects on economic development in longrun and short-run In short-term, financial integration de facto has significant and positive influence to economic development after one or two lags However, considering long-term efficient, this kind of integration turns to be significantly negative As in Dreher (2006), there was a positively significant effect of economic integration (including financial integration) on economic growth Bussière & Fratzscher (2008) showed up short-run gains from financial openness through liberalization mechanism in which GDP per capita increased roughly and FDI inflows remained high growing level after liberalization However, frequency to suffer crisis also increased toward capital account liberalization Bussière & Fratzscher (2008) emphasized the tradeoff on growing effect of capital liberalization between short-run and long-run Real GDP per capital indeed increased in the initial five-year of liberalization but then reduced Moreover, this study confirms the result from Eichengreen et al (2011) in which financial openness only benefits for welldeveloped financial system economies China appears to have a strong financial system with a huge money supply, great capital formation, large exchange reserve, and high FDI outflow The integrating regulation on finance of China appears to negatively associate with economic development in long-term The restriction on the interaction of domestic and global financial markets could be a regulation on domestic protectionism from Chinese Government Based on the ground of previous literature, 34 Bekaert et al., 2005, Bussière & Fratzscher (2008), Eichengreen et al (2011) all warned about the risk of suffering crisis from financial liberalization or financial openness Hence, Chinese government away encourages a strictly restriction on its economy especially on the financial market That could be a shield protect Chinese economy from the recent two global crisis Capital formation which represents for domestic capital in the Cobb – Douglas production function exhibits to significantly foster Chinese economic development in both long- and short-term While unemployment rate standing for domestic labor in the Cobb – Douglas function expresses mixed results In short-term, unemployment negatively affects to economic development in China but the lag length is different in each model In long-term, unemployment rate appears to have positive association with the development of Chinese economy In short-run, unemployment implies labor deficiency, then production in short-term will be harmful by lack of labor In longterm, even capital formation in China is relative high, Chinese labor force is also the largest labor force in the world in term of quantity Hence the capital per labor in China does not reach to its optimal level By other words, China did not reach optimal level of economy to scale In 2015, China reached to more than 6.3 thousand USD capital per labor, and around 14 thousand USD output per labor These were high level of per labor indices, however, the efficient of capital per labor was diminishing from 2000 to 2015 For example, in 2000, unit of capital per labor could produce nearly unit output per labor but in 2015 only 2.1 unit output per labor was created by a unit of capital per labor This evidence implied investment per labor in China has been losing its efficiency Then if unemployment was higher, investment per labor would increase Hence capital per labor tended to achieve its efficient level meaning that unless Chinese investment per labor reached its optimal level the more unemployment will lead to more productivity 35 Table Long run and short run effects reported by ARDL regression 36 Table presents robustness tests to ensure the cointigration, long-term, and short-term results from the ARDL model All models cannot validate the test for higher order serial correlation suggested by Breusch-Godfrey test Although the ARDL results confirm for cointegration relationship between financial integration and economic growth in China, the ARDL model does not assure for causality between the two variables Thus, we suggest Granger causality test to define the direction of influences among these variables Table Robustness tests Figure and present causal linkages among variables using Granger causality test While FI de jure does not have any causality with economic growth and other elements, the bidirectional causality between FI de facto and economic growth has been found in China 37 FI de jure Capital formation GDP per Unemploym capita ent Figure Causal relationship for model (direction of the arrow describes direction of causality) FI de facto Capital formation GDP per Unemploym capita ent Figure Causal relationship for model (direction of the arrow describes direction of causality) 38 Discussion Along the line of the literature on globalization, this study discusses on a gap of integration of individual country, here is China, which is a strongly emerging market of the world economy Previous studies indicated different results of globalization on economic development There are positive, negative, and unidentified effect of globalization or financial integration on economic growth As in table 6, we argue for short run gains and long run pains of financial integration in China In short-term, integrated financial system encourages the movement of capital transaction across Chinese border, then enhances economic growth after one or two years The evidence is that FDI flows and capital formation roughly increased in China since the middle of 2000s However, in long-term development, financial integration as both de facto and de jure restrained Chinese economic growth In other related empirical works, financial globalization and financial liberalization leads to high frequency of suffering economic crisis, especially in developing countries This study agree with these previous implication on the integration of financial system At first, negative effect of financial integration de facto on economic growth in long run may be explained by the existence of economic instability caused by the integrated mechanism Because we not take in to account any variables represent for crisis or economic instability, it would be another gap for further researches on the issue of financial integration Secondly, financial integration de jure in China always maintains at a low level, and it also negatively affects to Chinese economic growth with a weaker magnitude comparing to the de facto term As in table 6, the de jure financial integration does not influence to economic growth in short run This evidence implicates that Chinese government is extremely careful with its integrated strategy On the one hand, Chinese government represses on it financial system On the other hand, they increased their reserve and money supply at the same time in order to strengthening their domestic financial system as in those figures to China had a good preparation for its domestic economy before the world economic crisis Moreover, Chinese government maintains it low value currency during crisis periods They gained in short run by FDI out 39 flow, exporting, and other government investments to outside during global crisis in 2008 and 2012 After incredible development during global crisis in 2008 and 2012, economic growth in China started to postpone from 2014 After a shapely increase for a decade, China suffered slower growth caused by many trading barrages, especially from the US, and re-orientation of Chinese government in which China will now on focus on domestic consumption and service factors rather than trading elements which has been the most advantages of Chinese economy for along time Employing time-series analysis as aggregated level challenges us with several issues At first, we achieve to a quite long time sample but it is still a small sample in time-series analysis with only 33 observations ARDL bound test on the ground of ECM model allows us to identify whether long-term cointigration exists between financial integration and economic growth in China Secondly, most of pre-estimated tests and diagnostic tests confirm for a robust conitegration between financial integration and economic growth in China except for a weak problem of high order serial correlation Even serial correlation reported by Breusch-Godfrey test appears at a weak confidential level (10%), it could potentially lead to a miss leading conclusion This could be a weakness of this research However, bidirectional causality between financial integration de facto and economic growth in China Granger causality test indicates a It implies that not only economic growth in China was influenced by financial integration de facto but the level of integrated finance in China also be affected by the domestic economic performance This bidirectional causality confirms the complexity of the financegrowth nexus Oppositely, the de jure term of financial integration has no causal relation with economic growth in China Thus, we can imply that the “domestic protectionism” strategy from Chinese government mostly focuses on securing its domestic market rather than support for ecomomic growth Chinese government sacrificed a little benefit from anti-liberalizing financial regulation which announced by a significantly negative effect of de jure integration on economic growth in long 40 run (Table 6) Instead, they earned a lot in short run and avoided harmful from the two largest global economic crisis in 2008 and 2012, recently Concluding remarks As presented in Table 6, we argue for the short-run-gains and long-run-pains pattern of financial integration in China In the short term, financial integration motivates capital transactions across Chinese borders, thus enhancing economic growth However, in the long term, both financial integration de facto and de jure negatively associate with economic growth in China There is a warning for Chinese government about the future orientation of its financial system In addition, China government actively mantains the financial integration de jure at a low level, and the government seems to accept negatively effects of its strategy to economic growth in the long run Table presents insignificant effect of financial integration de jure on economic growth in the short run The evidence implies that the Chinese government is successful with its strategies for financial integration in the short run The Chinese government strictly controls its financial system Simutalneously increasing exchange reserves and money supply helps to stabilize and strengthen the domestic financial system The bidirectional causality between financial integration de facto and economic growth in China is found by the Granger causality test It implies that financial integration de facto encourages economic growth in China, and at the same time the level of integration of the Chinese financial market is adjusted by the domestic economic performance This bidirectional causality confirms the complexity of the finance-growth nexus On the other hand, we find no causal relationship between financial integration de jure and economic growth in China Thus, we can imply that the “domestic protectionism” strategy from Chinese government mostly focuses on securing its domestic market rather than support for ecomomic growth The development of China’s economy has been very impressive for the rest of the world, in particular for the developing and emerging countries This research is conducted to provide additional evidence on the finance-growth nexus in a special case of China In particular, we try to figure out whether or not (i) financial 41 integration encourges economic growth in China, and (ii) the cointegration between these two interested and important elements exists We suggest the use of CobbDouglas production function to explorethe growth effects of the financial integration in China With a relative small sample of yearly data, the ARDL model has advantages to VAR model to identify cointegration relationship between financial integration and economic growth in China In addition, we utilize Granger causality test to define causal relationship between interested variables Findings from this study indicate that financial integration, as proxied by an index of financial 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Chinese financial system integrates with the global system of finance, and how the integration affect to economic growth in China Therefore, we are interesting on the quality of financial integration. .. on financial integration Therefore, financial integration can influence economic development With regard to financial development, the literature has been developed from financial depth or financial