The ınfluence of financial markets, financial ınstitutions and economic growth on environmental quality and sustainability: Testing the LCC hypothesis in the case of China

Abstract China is the world's largest energy consumer and accounts for nearly one-third of global CO₂ emissions. The Shanghai Stock Exchange is the fourth-largest stock exchange in the world in terms of market capitalization, while the banking sector has the largest share in China's financial system. Given the prominence of both the banking sector and the stock market in China, specific policy recommendations are essential to achieve desired environmental outcomes. Therefore, this study aims to investigate the impact of both bank- and market-based financial development and economic growth on the environment in China. Unlike previous studies that primarily rely on conventional environmental indicators such as CO₂ emissions and the ecological footprint, this research introduces the Load Capacity Factor (LCF) as an innovative approach to assessing ecological balance. The Load Capacity Curve Hypothesis is tested using data from 1990 to 2020, employing the ARDL bounds test with structural breaks. The empirical findings indicate a positive and increasing connection between LCF and financial institutions as well as financial market indices in the short and long term. In contrast, the relationship between economic growth and LCF is negative and increasingly deteriorating, indicating the invalidity of the LCC Hypothesis in the context of China. Overall, the findings suggest that while financial development enhances environmental quality, economic growth exerts a detrimental effect. Based on these findings, the study emphasizes the need to promote green finance, expand investments in renewable energy, and strengthen cooperation between financial institutions, markets, and industrial sectors. Strengthening financial systems through legal and operational reforms, diversifying green financial instruments, and decreasing dependence on coal-powered energy generation are critical measures to achieve sustainable growth. Graphical Abstract