Green Finance and China's Industrial Transformation: Pathways and Pitfalls

Abstract

The intensifying challenges posed by climate instability and ecological deterioration have highlighted the urgent need for environmentally-conscious economic advancement, propelling green finance to the forefront as a strategic mechanism for harmonizing industrial progress with ecological preservation objectives.This study investigates the impact of green finance on industrial structure transformation in China, leveraging provincial-level panel data from 2003 to 2022. Employing fixed-effects models, instrumental variable approaches, and Doubly Debiased LASSO (DDL) regression to address endogeneity, we systematically analyze the mechanisms and regional heterogeneity of green finance’s effects. Results reveal that green finance significantly promotes industrial structure upgrading, primarily through enhancing green technology innovation and constraining carbon emissions. Mediating effect tests confirm these dual pathways, with green patents and emission reductions serving as critical channels. Heterogeneity analysis highlights pronounced effects in western and northeastern regions, high climate-risk areas, and provinces with stringent environmental regulations, while the eastern region exhibits a negative correlation, suggesting potential "green mismatch" issues. Robustness checks, including alternative variable specifications and lagged effects, corroborate these findings. The study underscores the necessity of region-specific green finance policies, enhanced coordination with environmental regulations, and targeted support for green innovation. These insights provide empirical support for optimizing green finance frameworks to advance China’s "dual carbon" goals and sustainable industrial transformation.