Finance and growth in China, 1995–2013: more liquidity or more development?

Lu Zhang and Dirk Bezemer

Cambridge Journal of Regions, Economy and Society, 2016, vol. 9, issue 3, 613-631

Abstract: We study the relation of financial development with income growth in China over 1995–2013. In panel and GMM analyses of province-level data, we find that accounting for the short-term spending effect of credit flows on growth, the effect of credit stocks to GDP (the traditional measure of financial development) is negative or insignificant. To identify the channels, we study the effects on GDP aggregates. Our findings suggest that credit expansion held back consumption growth by claiming resources for investment in gross capital formation and net exports. This effect is stronger with more rapid credit growth. The findings are consistent with an investment bias in China’s development path.

Date: 2016
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