Foreign direct investment, financial development, energy consumption, and air quality: A way for carbon neutrality in China

Air quality is a social, economical, and health issue for fast-developing countries such as China. Due to the overuse of nonrenewable energy, industrialization, and the population put pressure on air quality, which seriously threatens public health and economic growth. This study focuses on air quality and also aims to investigate the short-and long-run correlation between foreign direct investment, energy consumption, domestic credit, and financial development. The Autoregressive distributed lag model and the Granger non-causality test were carried out over the period from 1985 to 2018. The main findings of this study show a positive and significant long-run impact of energy consumption on air quality. In addition, domestic credit and financial development similarly show a significant positive short-run association with air quality. Moreover, the unidirectional causality correlation running from foreign direct investment and domestic credit to air quality was concluded by the Granger non-causality test. Considering the empirical analysis, this study suggests that domestic financial institutions should offer credit to industries at a low-interest rate in order to help them to switch from non-renewable to renewable energy consumption towards the promotion of sustainable and healthy air quality.