Financial Misallocation, Pollution, and Sustainable Growth: Theory and Evidence from China

The remarkable growth of China relied largely on excessive natural resources consumption is not feasible anymore; facing predicaments of economy growth slowing down, structural problems, and environmental degradation, the mission ahead for China is to achieve long-term sustainable growth. In this study, allocation of financial resource in China between polluting and non-polluting enterprises is verified, and a general equilibrium model considering environment and financial sector is built, which shows that financial institutions can have great impact on the environment and long term growth by allocating financial resources, which largely determines the development of industries. After that, an empirical study is carried out using panel data of 30 provinces in China. The results show that allocation of financial resource had a significant negative influence over environment. Based on the findings, it is argued that finance, due to its power in resources allocation, is supposed to play a role in structural reform and environmental protection. Improving financial resource allocation, promoting green finance, and encouraging social and environmental responsibility of financial institutions are helpful measures in the coming economic reform.