Finance and local economic growth: New evidence from China

We study the relationship between finance and growth using a sample of 275 Chinese cities from 2009 to 2018. We exclude bank loans to local governments through the local government financing vehicles (LGFVs) and construct a better financial development index which measures the level of loans extended by banks to enterprises and households. We find that financial development in the form of a higher loan-to-GDP ratio leads to lower economic growth. This negative relationship between finance and growth may be attributed to various mechanisms, including discrimination in bank lending, housing market bubbles, and an imbalance in growth between real and financial sectors.