Examining the nonlinear impact of the banking sector on economic growth: evidence from China’s Provinces

ABSTRACT This study examines the nonlinear impact of banking sector development on economic growth in China’s provinces from 1990 to 2017 using dynamic panel estimators. China has experienced rapid economic growth since its reforms; however, China has a repressed financial system as its banking sector reforms have lagged behind other reforms. Meanwhile, the finance-growth literature traditionally posits a positive relationship between the two. Consequently, China presents an interesting case study on the relationship between banking sector development and economic growth. This study investigates whether the relationship is nonlinear, and identifies whether a threshold level exists, where the impact of the banking sector becomes insignificant or negative. The results show that the relationship between banking sector development and growth is nonlinear, suggesting that there is an optimal level. Furthermore, the results show that high levels of banking sector development crowd out the positive impact of private investment. Policy implications are discussed.