China began its current economic reform in the late 1970s. Since initiating its reforms, China has restructured its banking sector from the old Soviet-style and monopoly banking system. Meanwhile, since China launched its equity market in the early 1990s, selling new stocks and bonds appeared to be another significant channel for enterprises to raise investment funds. This thesis investigates the influence of financial development on economic growth in China mainly by examining the banking sector and stock market performance. This study employs a consolidated dataset covering 30 provinces for 18 years to conduct the panel technique. Meanwhile, a monthly dataset of 10 years has also been established to explore Granger-causality tests of the financial development and economic growth linkages. The main findings of the research are that at first China's economic growth is driven by the quickly accumulated capital stock attributed to the rapid increase of fixed assets investment while the contribution of labour input to GDP growth is statistically modest. Secondly, on aggregated level, the Granger-causality estimated result does not support the hypothesis that China's banking sector has been playing a leading role in the process of economic growth. Meanwhile, based on the introduction of five banking sector indicators, the panel estimation result indicated that China's banking sector has not statistically generated any contribution to the economic development. Thirdly, the Granger-causality estimated results concluded that economic growth is the Granger-cause of the stock market capitalisation while no causality relationship exists between stock market development and economic growth when in term of market liquidity and volatility. The causality relationship was finally testified on the basis of investigating the whole financial market, in which circumstance the estimated result further confirmed that financial development is the effect rather than cause of China's economic growth. Overall, the thesis presents enough evidence to support the argument that the financial sector development has been acting the demand- following role in economic growth process in the context of China.
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