Internal mechanism analysis of the financial vanishing effect on green growth: Evidence from China

Using the panel data of 30 provinces in China from 2011 to 2018, this study examines the nonlinear relationship between financial development and green growth, as well as its internal generation mechanism by employing the Ordinary Least Square (OLS) method, Two-stage Least Squares (TSLS) method, System Two-step Generalized method of moments (System Two-step GMM) and dynamic panel threshold model of Seo et al. (2019). The empirical results reveal that, firstly, the scale of financial institutions (FDS) significantly inhibits green growth (GG), while the scale of the stock market (STO) significantly promotes green growth (GG). Secondly, there is a nonlinear relationship between financial development and green growth. There is an inverted U-shaped nonlinear relationship between the scale of financial institutions (FDS) and green growth (GG). That means when the ratio of the comprehensive level of financial development (FDCI) to the comprehensive level of technological innovation (TICI) is lower than a certain threshold, the development scale of financial institutions (FDS) will significantly promote green growth (GG). However, the scale of the stock market (STO) and green growth (GG) show an opposite linear relationship. This study proves that the financial vanishing effect differs in different proportions of the comprehensive level of financial development (FDCI) and the comprehensive level of tech-nological innovation (TICI). This study also analyzes the differences between the impacts of technological innovation (TI) and green technology innovation (GI) on the financial vanishing effect. In addition, compared with the underdeveloped western regions, the scale of financial institutions (FDS) in the more developed eastern and central regions has a stronger inhibitory effect on green growth. Compared with the economically developed eastern and central regions, the scale of the stock market (STO) in the economically underdeveloped western regions has a stronger role in promoting green growth. Finally, financial development can affect green growth by affecting capital misallocation (ABK) and energy intensity (EDS). This study provides new policy suggestions for the country to improve the financial system reform and optimize the financial market structure. This study also offers a reference for policy makers to formulate financial risk early warning mechanisms and avoid the financial vanishing effects. In short, this study provides new evidence for the green development of China's economy.