Based on a panel dataset of 28 provinces in China from 2004 to 2017, the paper employs a panel vector autoregressive (PVAR) model to establish the impulse response function, variance decomposition and Granger causality test, analyzing the relationship between shadow banking, local government debt and financial development. The results show that there is a dynamic coupling relationship between shadow banking, local government debt and financial sector development. The shadow banking provides diversified funding for local governments and promotes government debts when local government is confronted with financing constraints by the central government. In addition, the funding demand of the local government further increases shadow banking rapidly. Meanwhile, the excessive expansion of shadow banks jeopardizes the healthy development of financial markets, reduces the level of financial sector development, and then makes the local government financing constraints. However, financial development can't effectively restrict the shadow banking, because the government debt is the main driving force of shadow banking. The problem of shadow banking can't be solved effectively unless the local government's lending behavior can be controlled. Only through comprehensive consideration of the dynamic relationship between shadow banking, local government debt and financial sector development, can the regulars achieve the expected policy effect in the process of deleveraging.