Journal of Applied Finance & Banking, vol. 6, no. 4, 2016, 17-26
ISSN: 1792-6580 (print version), 1792-6599 (online)
Scienpress Ltd, 2016
Research on the Relationship between Financial
Development and Economic Growth: Based on an
Empirical Analysis of Shenzhen
Li Xiang
1
and Yang Dongye
2
Abstract
In this paper, panel data of Shenzhen from 2000 to 2012 was analyzed and capital, labor,
the policy of opening up and other factors were controlled, to make an empirical study of
the relationship between financial development and economic growth and draw main
conclusions as follows. Financial development can promote economic development.
However, financial development and real economic development show heterogeneity. That
is to say, financial development hinders the development of real economy.
JEL classification numbers: F43
Keywords: Financial development, Economic growth, Heterogeneity
1 Introduction
In recent years, the frequent outbreak and rapid spread of financial crises have caused
serious damage to the global economy. Some research suggested that the inconsistency
between the financial development and the development of the real economy is the root
cause of financial crises. Since the outbreak of financial crises, governments of various
countries around the world have taken appropriate measures to deal with these different
financial crises. In this environment, China, without any exception, has been subject to
damage caused by the financial crisis spreading all over the world. On a global scale, it has
become a major choice for various countries around the world to shift their focus back on
the development of the real economy and accelerate the development of the real economy,
in order to resolve the financial crisis and speed up the pace of economic rebound.
Meanwhile, the relationship between financial development and economic growth has
become a concern of the public. Therefore, it has gradually become a key for China to
1
Shanghai University of International Business and Economics, Shanghai, China.
2
Shanghai University of International Business and Economics, Shanghai, China.
Article Info: Received : March 2, 2016. Revised : April 4, 2016.
Published online : July 1, 2016
18 Li Xiang and Yang Dongye
coordinate the financial development and the development of the real economy and
accelerate the economic growth, while maintaining rapid financial development, so as to
achieve stable development of the Chinese economy in the future. At the 2011 Central
Economic Work Conference, the state leaders gave priority to the development of the real
economy for the first time, and stressed that China should “invest great efforts to the
development of the real economy to lay a solid economic foundation and strive to create an
social environment which encourages people to work steadfastly, do pioneering work and
acquire wealth through the real economy”. In addition, in the 2012 National Finance
Working Conference, the former Premier Wen Jiabao once again stressed the importance of
developing the real economy and put forward that China should follow the essential
principle that finance serves the real economy, and various financial institutions must firmly
establish the guiding ideology of serving the real economy, comprehensively improve the
quality and level of the real economy, and achieve co-existence and joint development of
finance and the real economy. China is not unique in this aspect, because many developed
economies including the US and some European countries have also attached great
importance to the development of the real economy. It is worth mentioning that since the
outbreak of the US financial crisis in 2008, the US has gradually adjusted and modified its
economic development pattern from the original debt-driven one into the current export-
driven one, and shifted its focus back to developing the real economy and speed up the
development of the manufacturing sector in the post-crisis era. Moreover, many European
countries have also put forward economic strategies to speed up the development of high–
end manufacturing sectors and accelerate the development of the real economy through “re–
industrialization”.
Judging from the overall development course of the world economy, countries with better
performance in real economy tend to be more stable in economic development and more
powerful in economic sustainability and competitiveness. Germany, as the fourth largest
economy in the world, can be taken as the most typical representative. The stable
development of the manufacturing sector in Germany as Europe’s number one economy
can be said to be the backbone of the German economy. Thus it can be seen that highly
valuing the development of the real economy (especially the manufacturing sector) is the
main reason why Germany can successfully resist the financial crisis and debt crisis. In
comparison, a large amount of funds have flowed in to the financial market, real estate
market and some virtual economic sectors in China, so it has been quite difficult for small
and medium-sized enterprises to finance. Worse still, precisely because of the inconsistent
development of the real economy and virtual economy, the Chinese economy has developed
many serious problems, such as asset bubble and industrial hollowing-out and so on.
According to in-depth discussions of these problems, the real economy is the foundation
for national economy of a state, while the virtual economy should serve and support the
development of the real economy. Therefore, the virtual economy itself does not create
value, but its profits are all from the real economy. So, the development and progress of the
real economy not only provides the basis for China to achieve rapid and stable economic
development, but also helps to promote the sustainable development of the Chinese
economy.
This paper falls into the following 5 parts. The first part is the introduction. In the second
part, a review of existing literature at home and abroad in related fields was undertaken. In
the third part, theoretical analyses and data specification were made. In the fourth part, the
econometric model was set and tested. In the fifth part, research conclusions were drawn,
and research implications were given.
Research on the Relationship between Financial Development and Economic Growth 19
2 Literature Review
A lot of domestic and foreign scholars have investigated the relationship between financial
development and economic growth. In this part, a review of relevant literature was
undertaken.
In general, some foreign scholars have gained rich research results of the relationship
between financial development and economic growth. Overall, since Schumpeter put
forward that financial development can promote economic growth in 1911, foreign scholars
have formed 3 ideas on the relationship between financial development and economic
growth. The first idea was initiated by Goldsmith (1969), Fry (1978) and other scholars.
According to their research results, financial development, to some extent, can promote the
economic growth. Scholars represented by Patrick (1996) put forward the second idea that
financial development can restrict the economic growth. The third idea suggested that the
financial development and economic development have interaction effects on each other.
Representative scholars of this idea include Demetriades and Hussein (1996). After
research achievements of foreign scholars were summarized, a review will be undertaken
to figure out how domestic scholars see the relationship between the financial development
and economic growth. Chinese scholars have conducted a large number of experimental
research to investigate the relationship between financial development and economic
growth from different perspectives.
Chinese scholars have put forward following ideas. Wang Zhiqiang and Sun Gang (2003),
Fan Xuejun (2006), Wang Yongqi(2006), Lu Jing (2012) and other scholars have made a
large number of empirical research to prove that financial development can promote the
economic growth. Research findings of Li Yong and Gao Yu (2010), Yang Long and Hu
Xiaozhen (2011) and other scholars suggested that promoting effects of financial
development on the economic growth vary by region. Moreover, Li Yankai and Han
Yanchun (2011) believed that the effectiveness of the promoting effect of financial
development on the economic growth is subject to the influence of the external financial
eco-environment (such as government intervention in the economy, legal environment and
credit culture and environment and so on). Research of Wu Zhi (2010) indicated that
although financial development can promote the economic growth, financial development
is essentially triggered by the economic growth. That is to say, financial development and
the economic growth can promote each other. A lot of studies have proved that financial
development can promote the economic growth, but some studies have come to totally
opposite conclusions. Li Guangzhong and Chen Ping (2002), Zhang Chaobing (2010) and
other scholars found that financial development does not have obvious impacts on the
economic growth.
Based on a review of existing literature in related fields, most of existing studies suggested
that financial development can promote the economic growth.
3 Data Specification, Definitions to Real Economy and Theoretical
Analysis
3.1 Data Specification
In the following table, the overall development condition (reflected by changes in the total
output value and its growth) and the development condition of the financial sector (reflected
20 Li Xiang and Yang Dongye
by changes in the output value of the financial sector and its growth) in Shenzhen during
the 13 years from 2000 to 2012 are shown. Changes in the ratio of the output value of the
financial sector to the total output value can be seen from the table. Data of Shenzhen in
2013, 2014 or even 2015 was not included, because 2012 data of Shenzhen is the latest data
released in the “Shenzhen Statistical Yearbook”. In terms of changes in the total output
value of Shenzhen in the 13 years, its total output value had increased from
218,745,150,000 yuan in 2000 to 1, 295, 006, 010, 000 yuan in 2012, experiencing a 6-
fold increase in just over ten years, which indicated the rapid economic development of
Shenzhen. In terms of the growth rate of the total output value in Shenzhen, its growth rate
showed an upward trend from 2000 to 2003, but a downward trend from 2003 to 2005,
perhaps because of the Asian financial crisis. However, the growth rate of its total output
value fluctuated from 2005 to 2008. In the year of 2009, its total output had increased, but
the growth rate had decreased from 0.1449 to 0.0532, suffering a nearly 50% decline. This
indicated that the 2008 financial crisis which spread from the US to the world constituted
some damage and shock on the Chinese economic development (Shenzhen is one of
rapidly-developed cities in China, so it is representative). China did not get stuck in the
financial crisis, but quickly walks out of the shadow of the financial crisis. Therefore, from
2009 and 2012, the growth rate of Shenzhen’s total output value had rebounded quickly
and stayed at a high level. Moreover, data was also collected to investigate the development
condition of the financial sector in Shenzhen. The output value of its financial sector had
increased from 22,153,910,000 yuan in 2000 to 172,111,520,000 yuan in 2012, with a
