Do Carbon Emissions Hurt? Novel Insights of Financial Development and Economic Growth Nexus in China

This paper examines whether financial development affects economic growth across different levels of carbon emissions in 30 Chinese provinces from 1990 to 2022. We employ a novel partially linear functional-coefficient model with latent factor structure. This approach relaxes the traditional assumptions of linearity and cross-sectional independence, allowing us to capture more flexible growth patterns. Our empirical findings reveal three key insights: (i) the positive effect of financial development on economic growth follows a nonlinear pattern—it initially strengthens as carbon emissions increase but declines rapidly after emissions reach a threshold; (ii) innovation and openness show limited impacts on economic growth; (iii) regional variations exist based on resource endowment. These findings offer important policy implications. Promoting green financial products could extend the beneficial range of carbon emissions for economic growth. Optimizing innovation structures and supervising foreign enterprises may help unlock growth potential while preventing pollution transfer. Regional strategies would benefit from accounting for resource disparities.