Abstract
China's economy has achieved remarkable success, while it has also paid a high environmental cost. Environmental pollution not only causes great economic losses, but also severely restricts the development of society. Both theory and practice demonstrate that financial development plays a significant role in environmental governance, but the internal mechanism of its impacts has remained to be explored. It is vital to investigate the influence mechanism of financial development on the environmental quality in order to accomplish sustainable economic development through finance and enhance environmental quality concurrently. This paper, using mediating model, spatial Durbin and spatial error model, constructs a theoretical framework financial development on environmental quality from two dimensions, i.e., Financial Interrelations Ratio (FIR) and Financial Efficiency (FE), based on panel data of 234 cities in China from 2010 to 2019. And the results are as follows: (1) the improvement of Financial Interrelations Ratio (FIR) and Financial Efficiency (FE) had not yet reached the level of environmental pollution improvement; (2) in terms of mechanism, the rise of the level of financial development promoted economic growth, but inhibited the optimization of industrial structure, which increased industrial pollution emissions and deteriorates environmental quality; (3) urban environment had significant spatial dependence; (4) the impact of financial development on environmental quality in eastern region has been transformed into an improvement effect, while it still shows a deteriorating effect in central and western regions. Some policy recommendations related to the use of financial development to improve environmental quality are proposed at last, which will help to promote ecological protection and high quality synergistic economic development in China.