Impact of financial development on the development of the renewable energy industry of China

Abstract

Building a new electricity system based on renewable energy reflects the strategic direction of China's low-carbon energy transition, we examine the role of financial development in this process. Distinguishing from existing studies, we focus on the four dimensions of bank intermediation, bond market, stock market and FDI and to measure the growth in the renewable energy industry (RE) using aggregate and relative volume indicators. There are three main findings in this paper. First, bank credit and bond financing are the most important external financing instruments. Second, the effect of FDI on RE is significant only in southern China. Third, the effect of the stock market on renewable energy production is related to the regional financial market environment and the intrinsic dynamics of transformation, which is more significant in the southern and energy-rich regions but not fully evident in the northern and energy-poor regions. Regarding the mechanism of influence, in the South, bank intermediation, the bond market and the stock market contribute to renewable energy technology and thus to the capital formation of enterprises. FDI can force renewable energy firms in the South to increase their innovative decisions and helps promote the share of renewable energy production. In energy-poor regions, bank intermediation and bond markets are more conducive to promoting renewable energy technology and thus industry growth. Further study finds that the favorable policy signals released by the central government can lead to more financial capital allocations to the industry, which in turn creates diversified financing channels for enterprises.