Finance and Productivity Growth: Evidence from China

ABSTRACT This paper examines the effects of finance on total factor productivity (TFP) growth based on panel data of 30 Chinese provinces from 2000 to 2016. We find that financial volatility has a significantly negative effect on TFP growth while the effect of financial development on TFP growth is nonlinear and inverted U-shaped. Further analysis shows that the effect of financial volatility on TFP growth is strengthened during boom periods of financial and business cycle but weakened during the bust periods. We also find that better developed financial systems are more capable of absorbing financial and business cycle shocks.