We find strong evidence of cross-sectional dependence in the provincial panel, and confirm the presence of cointegration relationship between GDP, investment, human capital and various energy variables even after taking into consideration interdependence across provinces. Using a continuously updated fully modified estimation proposed by Bai et al. (2009), we find that human capital is a crucial factor input which exerts about 2-3 times effects investment has on GDP; energy, both total energy consumption and various disaggregate energy such as coal, crude oil, petroleum products, natural gas and electricity, plays a significant role in economic development in China as well. Therefore, both human capital and energy are indispensable in stimulating economic growth.Using recently developed bootstrap panel Granger causality test which is appropriate within the cross-sectional dependence framework, we find Granger causal relationships running from coke to economic growth, running from GDP to crude oil, petroleum products and electricity, and bi-directional relationship between GDP and coal, natural gas and total energy consumption in the whole China. For individual provinces, causal relationships vary significantly. This has important policy implications to especially local governments in the sense that while following the macro- and strategic policies from the central government, local governments should take initiatives and evaluate their unique economic stage and energy status as well as the causal relationship between the two before taking micro- and specific measures.
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