The relationship between finance and growth in China

Abstract

We examine the non-linearity between financial development and economic growth in China. Specifically, we use a threshold model to investigate whether provinces with high level of personal income can exploit financial development efficiently. Empirical analysis, using cross-provincial data from 1978 to 2010, shows that finance has a strong positive influence on growth in high-income provinces, but a strong negative impact on growth in low-income provinces. The results are robust to an alternative financial development measure. Furthermore, we find that China's state sector, notorious for inefficiency and low productivity, accounts for a large proportion of industrial output in low-income provinces, causing bank loans to have a negative impact on economic growth.