Financial depth or breadth: What really matters for fighting air pollution in China?

Abstract

China's rapid economic development leads to a series of environmental problems in the long run, such as air pollution. Environmental pollution has become a bottleneck restricting the sustainable development of China's economy. As such, pollution has become a key issue for China as it tries to continuously improve environmental quality and establish a harmonious coexistence between man and nature. This paper uses spatial econometric analysis to empirically test the existence of the Environmental Kuznets Curve (EKC) in China while also examining the impact of financial development on its inflection point by applying Air Quality Index and PM2.5 data of 283 prefecture-level cities in China from 2015 to 2017. Findings from this study indicate that the EKC of air pollution in the whole country presents an inverted U-shape based on both the traditional and new EKC models. After testing the sub-sample in different areas, the EKC still presents an inverted U-shape based on the new EKC model in the eastern and central areas, though not in the western area. In considering the moderating role of financial development based on the new EKC model, we find that the increase of financial depth will cause the EKC inflection point to shift to the left on the national scale and in the eastern region, while the effect of the financial breadth will be largely insignificant. With regard to the central area, both the breadth and the depth of financial development will significantly shift the inflection point to the right, delaying the arrival of the EKC inflection point. Therefore, the local authority of each area should formulate differentiated financial development policies to promote the early arrival of the EKC inflection point.