This paper studies the relationship between regional economy gap and financial development in China during the post-1978 reform period. Recent studies, based on cross-country data and macro-economy data, have found a positive association between these two variables. We find that an invisible correlation between growth of provinces or region and financial intermediation, and financial development is not the cause of regional economy gap. The non-state sector, which contributed most to China’s remarkable growth during this period, did not use the domestic financial system in any substantial way for financing. The same appears to be true for the faster-growing provinces. Compared to foreign investment, domestic private credit played a relatively small, although statistically significant, role in financing the non-state sector and fast-growing provinces.
