Financial development, energy consumption and China's economic growth: New evidence from provincial panel data

In recent years, China has experienced a period of rapid economic transition to the sustainable style of economic development, which is termed as the “new normal”. Although the extant literature has verified that investment and foreign business are two main growth engines of China's economy, investigations on the impacts of financial development and energy consumption on economic growth using a comprehensive framework are still scarce. This paper examines the dynamic interrelationship between financial development, energy consumption and economic development using the data on 29 Chinese provinces covering the period from 1995 to 2014. The empirical results indicate that energy consumption is the Granger cause of GDP, while financial development is not the Granger cause of GDP. Additionally, according to the estimation results of the impulse response function, financial development has a negative effect on GDP, while energy consumption could foster economic growth. Among the control variables, capital stock contributes significantly to economic growth. Further reforming the financial system and accelerating the transition of the economic structure are vital for China's sustainable economic growth as the pressure of controlling the excessive growth of energy consumption and improving environmental quality accumulates over time.