An empirical analysis of the correlation between the credit channel and real GDP growth within China. An investigation with provincial level panel data

The China growth story has been nothing short of remarkable, this paper offers an insight into the determinants of growth with the aid of yearly panel level data for 30 of Chinas provinces from 1978-2008. More specifically a detailed look is provided whereby the correlation between real credit growth and real GDP growth is analysed to gauge the impact of the credit channel upon output, at the aggregate and provincial level. The unique monetary framework within China, whereby government controlled, The People Bank of China (PBC) exercises upmost control over monetary decision making and hence the flow of the credit channel allows for an intriguing study. The correlation between real credit growth and real GDP growth is empirically tested using ordinary least squares (OLS) and Generalized Method of Moments (GMM) at the aggregate national level as well as the provincial level. Findings suggest that real credit growth does in fact aid and contribute to real GDP growth within China, although the relationship appears not to be equally distributed among all 30 provinces.