Financial deepening does cause income growth of rural residents: Insights from the relationship between government and market in China.

This paper examines the impacts of government-market relation (measured by the degree of marketization) on the link between financial deepening and income growth of rural residents. Using macro panel data covering a period from 2010 to 2021 across 31 provincial administrative regions in China, we create an interaction variable that captures the interplay between financial deepening and the degree of marketization. Employing a fixed effects model and a dynamic panel regression model, we derive three robust findings from the regression analysis: (1) the higher the degree of marketization, the stronger the promotion effect of financial deepening on the growth of rural residents' income, with a one-year lag effect; (2) the higher the degree of marketization, the stronger the promotion effect of financial deepening on the wage income of rural residents, with a one-year lag effect; (3) the higher marketization fails to create the promotion effects of financial deepening on the net business income and net property income of rural residents. These results suggest that financial deepening aimed at raising rural residents' incomes in provinces, where China's marketization has slowed down, stagnated, or retrogressed, will have difficulty reaching its goals, and that some of the financial and economic problems affecting the growth of rural residents' business and property incomes remain unresolved.