Capital Freedom, Financial Development and Provincial Economic Growth in China

For more than three decades, China has managed to combine rapid economic growth with a strictly regulated financial sector. The discrepancy between economic and financial development has raised the question of whether China might be an exception to the so-called finance–growth nexus. This study examines the relationship between finance and growth at the provincial level in China using a new set of measures of capital freedom and financial development. The results indicate that capital freedom and financial development are associated with both higher income and growth rates. In particular, we find that the marketisation of financial institutions and strengthening of legal and government institutions have a particularly strong impact on income and growth in low-income provinces. © 2016 John Wiley & Sons Ltd