Local Crowding‐Out in China

Abstract

In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state-owned firms' investment unaffected. We establish this result using a purpose-built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow. IN CHINA, LOCAL GOVERNMENT DEBT almost quadrupled from 5.8% to 22% of GDP over the 2006 to 2013 period. This increase in local public debt was due largely to the fiscal stimulus program carried out after 2008, worth US$590 billion, together with much-reduced reliance on central government debt and transfers to local governments. Based on a novel, purpose-built database on the public debt of prefecture-level Chinese cities from 2006 to 2013, we show that the increase in local public debt crowded out private investment in the

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