An empirical research on the relationship between sources of financing and economic growth in China

Abstract

China's remarkable success in IT has speeded up development in its financial markets that would make financing proceedings more efficiently than before. Three major sources of financing are selected for analysis: borrowing from financial institutes, issue of shares or bonds to the public (IPO), and foreign direct investment (FDI) inflow. After a series of tests including Granger Causality and Co-integration, a regression model and an error correction model are built. Our research is summarized that: (1) China is a bank-based economy that helps launching of monetary policies, (2) the supply-leading and market-based hypothesis also work in China, (3) the economic growth is positively affected by the three sources of financing, but FDI is found the highest impact on economic growth, (4) facing increasing loan stock, higher gearing will lead to higher finance costs and lower borrowing power, (5) both money supply and interest rates do not granger cause GDP and vice versa in the research, their influence on GDP is not straight forward that needs further research.