Financial development and economic growth in China

Abstract

The purpose of this paper is to examine the relationship between financial development and economic growth. In particular, the authors examine the impact of financial development on the growth of primary, secondary, and tertiary industries in China. Ordinary Least Square (OLS) multiple regressions are applied on a set of data from China for the period 1978 to 2013 to determine the effects of financial development on economic growth, while controlling for other macroeconomic variables, namely labor force, capital growth, inflation rate and export growth. The empirical results show that financial development has a negative effect on economic growth in general, but on the growth of the tertiary industry in particular. By contrast, it is found that financial development has no significant effect on the primary and secondary industries. The findings offer policymakers some useful insights that more attention may need to be paid on developing capital markets and providing more investment choices/opportunities for Chinese households. This paper is different from most of the previous studies as it uses up-to-date data (1) from China capturing the effects of financial development on economic growth in addition to other macroeconomic factors.