Public Debt and Private Firm Funding: Evidence from Chinese Cities

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing …rms by tightening their funding constraints, while it did not a¤ect state-owned and foreign …rms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing …rms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative e¤ect on investment by private …rms in industries more dependent on external funding. Finally, in cities with high government debt, …rm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the …rm's likelihood of being credit-constrained. Altogether, these results suggest that, by curtailing private investment, the massive public debt issuance associated with the post-2008 …scal stimulus sapped long-term growth prospects in China.

Debt, Corruption and Investment in East Africa: A Panel ARDL Analysis

“…Support for the crowding-out effect can further be located in a study by [6], where he uses a novel data for local public debt issuance for China during the period 2006-2013. The results show that local public debt issuance crowded out investment by private manufacturing firms by tightening their funding constraints.…”

“…The third strand of literature consists of categories of authors that provide inconclusive evidence on the relationship in question. For example, the second analysis of the aforementioned study by [6]…”

Risks in China’s Financial System

“…Cong and Ponticelli (2016) also show that new credit was allocated disproportionally more towards state-owned, low productivity firms than to privately-owned, high-productivity firms, reversing the prior trend of efficient reallocation. Using data from -2013, Huang, Pagano, and Panizza (2016 provide evidence that the debt issuance by local governments crowded out investment by private 21 See Bonin and Huang (2001) for how the state dealt with bad loans in the early 2000s; see the State Council (2016) for a recent plan for the Debt-for-Equity Swap. manufacturing firms.…”

Corporate Foreign Bond Issuance and Interfirm Loans in China

“…Finally, our work is related to the growing literature on the development of Chinese capital markets and on the unintended consequences of the Chinese fiscal stimulus (Bai, Hsieh, and Song (2016) ;Huang, Pagano, and Panizza (2016); Cong, Gao, Ponticelli, and Yang (2017); Allen, Qian, Tu, and Yu (2017); Acharya and Vij (2016); Chen, Ren, and Zha (2016) ;Brunnermeier, Sockin, and Xiong (2017); Gao, Ru, and Tang (2017)).…”

“…Most of the funds were channeled through local governments and funded with bank loans (Bai et al (2016) estimate that about 90 percent of local government investment was financed with bank loans in 2009). This policy action tightened the credit conditions faced by private firms (Huang et al (2016)) and led to a rise in the shadow lending rate (Wenzhou rate) faced by Chinese firms, which increased from approximately 13 percent in the winter of 2009-2010 to nearly 21 percent in mid-2011 ( Figure 1). The shadow rate decreased again in late 2011, but at 15 percent in 2016 it remained well above its pre-global financial crisis level of 10-11 percent.…”