Financial Openness and Economic Growth in China: Threshold Effects of Financial Development Across Urban Agglomerations

Abstract

This study examines how financial development (FD) conditions the effect of financial openness (FO) on economic growth across China’s three major urban agglomerations: Jing-Jin-Ji, the Yangtze River Delta, and the Pearl River Delta. Using a balanced panel of 10 provinces, municipalities, and special administrative regions from 1995 to 2022, the analysis applies Hansen’s panel threshold regression model, with real per capita GDP growth as the outcome and an FD index constructed through principal component analysis as the threshold variable. The estimates identify two FD thresholds, 0.7328 and 1.0401, which divide the FO–growth relationship into three regimes. Financial openness promotes economic growth in all regimes, but its effect is strongest at moderate levels of financial development. Specifically, the estimated FO coefficients are 2.622 when FD is at or below 0.7328, 3.869 when FD lies between 0.7328 and 1.0401, and 2.068 when FD exceeds 1.0401. These results indicate diminishing returns to openness once financial systems become highly developed. Trade openness, fixed-asset investment, and inflation are also positively associated with growth, whereas the effect of higher-education graduates is negative but statistically insignificant. Robustness checks using additional bootstrap replications, nonlinear interaction terms, winsorization, and alternative variable transformations confirm the double-threshold structure and the stronger growth effect within the moderate-FD regime. The findings show that the benefits of financial integration depend on domestic financial maturity. Accordingly, policymakers should pursue region-specific reforms that deepen financial capacity in less-developed areas while containing over-financialization and strengthening regulation in advanced urban economies.

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