Does Financial Development Necessarily Lead to Economic Growth? Evidence from China’s Cities, 2007–2014

Using data from 286 Chinese cities over the period 2007–2014, this paper investigates the impact of financial development on economic growth. Our results from traditional cross-sectional regressions, first-differenced GMM and system GMM regressions all show that financial development does not have any significant positive effects on economic growth, while some indicators of financial development show significant negative effects on growth. Our results are consistent with many existing studies that a state-ruled banking sector, such as that of China, hinders economic growth because of the distoring nature of the government. To examine the sensitivity of our results, different sets of control variables sets are experimented with. Our results are shown to be robust. Our finding shows that to let the financial sector play a more efficient and effective role in promoting real economic growth, China has to further reform its financial system