Financial Leverage, Economic Growth and Environmental Degradation: Evidence from 30 Provinces in China

This study seeks to investigate the endogenous relationship between financial leverage, economic growth and environmental degradation in China by employing a the generalized moments method (GMM) panel vector autoregressive (PVAR) approach with a panel of data from China’s 30 provinces over the period 1997–2016. Three key results arise. First, financial leverage can significantly lessen economic growth, while economic growth decreases financial leverage. Second, economic growth provides an important impetus to boost carbon emissions. Finally, carbon emissions have inversely pushed up financial leverage. These results reflect to some extent China’s impressive rate of economic growth, which has been attained via continuously supporting inefficient state-owned enterprises and heavy and polluting industries through bank loans. The results are further supported by the variance decomposition. The findings provide valuable policy implications for deepening financial supply-side structure reform to transform and upgrade China’s real economy. These policy implications are conductive to developing a low-carbon economy.