Does the resource curse hypothesis hold in China? Evaluating the role of trade liberalisation and gross capital formation

Abstract

In this study, we thoroughly examine the validity of the resource curse hypothesis in China by investigating the role of gross capital formation, trade globalization, political stability, and economic growth for the period spanning from 1985 to 2020. To accomplish this, we employ the ARDL estimator, which allows us to assess the relationship between these variables and financial development. The findings of our study hold significant implications, particularly considering the growing interest in understanding the potential impact of natural resources on financial development. The resource curse hypothesis suggests that abundant natural resources can hinder rather than foster financial development. Our results lend support to this hypothesis, as we find that natural resources have a detrimental effect on China's financial development. Furthermore, our study reveals that economic growth plays a crucial role in enhancing financial development in China. Additionally, we observe positive impacts of trade globalization and gross fixed capital formation on financial development. However, while political stability exhibits a positive influence on financial development, we find that this relationship is statistically insignificant. Through our time-varying causality analysis, we uncover dynamic patterns of causality between financial development and the examined variables (economic growth and natural resource rent) across different time periods. Notably, we identify feedback causality between financial development and these variables. However, we detect unidirectional causality flowing from political stability, gross capital formation, and trade globalization to financial development.