Finance-growth nexus in China from an endogenous switching perspective

Abstract

This study examines the relationship between financial development and economic growth across Chinese provinces with switching causality. Four states are considered: bidirectional causality (state 1); one-way causality from growth to finance (state 2); one-way causality from finance to growth (state 3); and non-causality (state 4). While state 3 dominates in developed regions, states 1 and 3 occur intermittently in other regions. This implies that the demand for financial services induced by local economic growth plays a stronger role in driving financial development in under-developed regions. Consistent with prior research, bank loans negatively affect economic growth in China.