Too costly to make a difference - An examination on the relationship between online financing and economic growth

Oct 23, 2026

Online financing activities can expand financial coverage and improve access to credit, yet they often involve high capital costs that can suppress economic growth. Using panel data from 282 Chinese cities over 2011–2020, the study tests the relationship between online financing and growth with multiple empirical models. Results show no significant effect of online financing on economic growth, including in cities with less developed formal financial systems.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages21

Reading Time53 min

AccessFree to download

Introduction

Financial development and economic growth

Information asymmetry and transaction costs

Online lending platforms vs. formal and offline informal finance

Received: 15 November 2022 Revised: 16 January 2024 Accepted: 2 February 2024 DOI: 10.1002/ijfe.2953 RESE ARCH ARTICL E Too costly to make a difference: An examination on the relationship between online financing and economic growth Jiapin Deng | Yanchu Liu | Wenyue Xiao Department of Finance, Lingnan College, Sun Yat-sen University, Guangzhou, China Correspondence Yanchu Liu, Room 209, Lingnan Administration, Center, Lingnan College, Sun Yat-sen University, No. 135, Xinggangxi Road, Haizhu District, Guangzhou 510275, China. Email: [liuych26@mail.sysu.edu.cn](liuych26@mail.sysu.edu.cn) Funding information National Natural Science Foundation of China, Grant/Award Numbers: 72002224, 71991474, U1811462 Abstract While facilitating people's access to finance and promoting financial coverage, online financing activities involve high capital costs that suppress economic growth. Using 282 Chinese cities during 2011–2020 as the sample, we examine the relationship between online financing and economic growth. Exploiting a variety of models, we find that online financing activities do not have significant effects on economic growth. Further evidence shows that the insignificant relationship between online financing and economic growth also exists in cities with less developed formal financial systems. Our analysis based on the context where borrowers and lenders do not know each other offline implies that the technology intended to promote financial coverage, if not reducing information asymmetry and hence the cost incurred in financial transactions, does not necessarily lead to desirable economic and social outcomes. KEYWOR DS economic growth, Fintech, information asymmetry, online financing 1 | INTRODUCTION Fintech, or financial technology, is changing the way of credit allocation. Driven by pervasive Internet and smartphone penetration, informal finance is experiencing a revolution from offline to online around the world. Nowadays, although traditional banks are still the dominant credit suppliers, some large Internet-based companies have also become major players in the credit market. Despite a large body of literature studying whether and how financial development promotes economic growth, few studies focus on the impact of online financing activities.1 Across the globe, many observers claim that the online lending industry expands financial services without the presence of geographic barriers, arguing that online platforms can make a difference in the provision of financial services and hence promote economic growth. However, the high financing cost through the online financing platforms may suppress the role of online financing in promoting economic growth. In this paper, we study the effect of online financing activities on economic growth by using novel panel datasets from China. The channels through which financial development can promote economic growth have been well documented in previous literature. Efficient financial intermediation can improve allocative efficiency by screening out bad projects (Bagehot, 1873), lowering information acquisition costs (Boyd & Prescott, 1986; Diamond, 1984), facilitating the entry of firms with innovative technologies and the exit of firms with outdated technologies or business practices (Schumpeter, 1912), and improving corporate governance (Jensen, 1986) . However, not all aspects of financial development lead to homogenous economic consequences. For example, as a component of informal finance, the peer-to-peer (P2P) lending industry 904 © 2024 John Wiley & Sons Ltd. [wileyonlinelibrary.com/journal/ijfe](wileyonlinelibrary.com/journal/ijfe) Int J Fin Econ. 2025;30:904–924. expanded rapidly in China since 2010, but this market came to complete end in 2020, leaving millions of lenders with losses.2 The 2008 global financial crisis also demonstrated that unregulated financial innovation would bring about socially undesirable outcomes. One of th

FAQs

What central question does the study investigate?

The study examines how online financing activities affect economic growth, using Chinese city data from 2011–2020.

What do the empirical results show about the link between online financing and growth?

The analysis finds that online financing activities do not have significant effects on economic growth across the sample.

Why might online financing fail to promote growth according to the paper’s mechanism?

Because borrowers and lenders typically do not know each other offline, information asymmetry can raise transaction costs, which may deter higher-quality borrowers and reduce growth impacts.

Oct 23, 2026

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