Does green finance crowd out conventional investment in China?

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Abstract

This study examines whether the growth of green finance in China exerts a crowding-out effect on traditional investment by analyzing the dynamic spill-over relationships between green and conventional financial returns. The current research discusses the dynamic relation between green and conventional finance, similar to Peng et al. (2023). The study utilizes daily time series data and applies the Diebold-Yilmaz (DY) spillover index and Baruník–Křehlík (BK) frequency domain decomposition, and tries to capture both total and directional connectedness across different time horizons. The outcomes reveal a marginal but, to some extent, increasing level of interdependence with traditional investments. Historically, these act as net transmitters of volatility, particularly green finance, which depicts rising influence during periods of market turbulence, demonstrating its evolving systemic importance. The frequency domain analysis further distinguishes the short-term responsiveness of green returns, which is found to mark sharp volatility spillovers during a crisis. The findings of this study do not confirm a complete crowding out of traditional finance. However, they indicate a transition towards movement together and competitive coexistence. The results offer important implications for policymakers and researchers who are seeking to balance sustainability goals with financial stability.

Keywords: Green Finance, Crowding Out, Spillover Analysis, Chinese Listed Companies, Conventional Investment

Authors’ individual contribution: Conceptualization — J.X. and M.F.A.R.; Methodology — J.X. and T.S.; Software — J.X.; Validation — T.S. and A.H.M.A.; Formal Analysis — J.X. and T.S.; Investigation — J.X. and T.S.; Resources — J.X., T.S., A.H.M.A., and M.F.A.R.; Data Curation — A.H.M.A.; Writing — Original Draft — J.X.; Writing — Review & Editing — J.X., T.S., A.H.M.A., and M.F.A.R.; Visualization — J.X.; Supervision — A.H.M.A. and M.F.A.R.; Project Administration — A.H.M.A. and M.F.A.R.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C32, E44, G15, Q56

Received: 07.08.2025
Revised: 06.11.2025; 05.01.2026
Accepted: 26.01.2026
Published online: 29.01.2026

How to cite this paper: Xu, J., Sarmidi, T., Mohd Azam, A. H., & Abd Razak, M. F. (2026). Does green finance crowd out conventional investment in China? Corporate and Business Strategy Review, 7(1), 214–225. https://doi.org/10.22495/cbsrv7i1art19