This paper explores the impacts of FDI on financial development in China. Based on panel data at provincial level between 1987 and 2004, this empirical study shows that FDI propels loans by the four large state-owned banks but produces no effects on loans by other financial institutions. Using simultaneous equation modeling, the paper further shows that the financial deepening measured by loans by the four large banks plays a positive role in attracting FDI, which means that the causality between them is two-way. By reducing the information asymmetry between the state-owned banks and their clients, FDI improves the efficiency of the financial system. Those modern firms having connections with FDI thus become the new target clients of the state-owned banks.