To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China

Abstract

Using a panel of Chinese firms over the period 2003-2013, we show that, from the supply-side perspective, as a result of the implementation of the economic stimulus package in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability, and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs. in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs.

Bank Work Experience Versus Political Connections: Which Matters for Bank Loan Financing?

“…The larger coefficient of Bank compared with that of Political also suggests that the effect of bank connections on reducing financing costs is more significant than that of political connections. In column 2, we find that political connections are helpful for obtaining more short‐term loans, which is consistent with the evidence provided by Liu et al (), while bank connections facilitate long‐term loans, although the effect is insignificant. In column 3, we find that neither connection has a significant effect on the interest rate level.…”

Trade credit use and bank loan access: an agency theory perspective

“…Our results are consistent with those of Liu et al . (), who find that the majority of new bank loans from the stimulus plan were extended to state‐owned enterprises (SOEs) and that most banks did not loosen their criteria when making loans to private firms.…”

Financial Sector Development, Economic Growth and Stability

“…The second strand refers that the Chinese banking system is influenced by the government to serve both political and economic goals and sometimes have to finance state-owned enterprises in loss (Cull and Xu, 2003;Allen et al, 2005;Firth et al, 2009;Chen et al, 2013). In addition, the Chinese banking system is also regarded to play a essential role on funding government expenditure in "RMB 4-trillion stimulus plan" and following the loosened monetary policy and signals from the central government to increase bank credit supply to promote economic recovery (Wen and Wu, 2014;Liu et al, 2018).…”

“…Second, I investigate which firms have benefited more from these financial and fiscal policies, after controlling for some external economic factors. My motivation is based on studies focusing on the role of firm characteristics (such as size or ownership) on credit constraints in the case of different countries (Berger and Udell, 1998;Galindo and Schiantarelli, 2003;Huang, 2008;Chan et al, 2012;Poncet et al, 2010;Liu et al, 2018). I base my investigation on firm-specific characteristics such as size, liability ratio, profitability, ownership and industry.…”

“…The results show that the stimulus had a temporary boost in economic activities for about two years. Liu et al (2018) use firm-level data to investigate the results of economic stimulus package in China and find that state-owned enterprises (SOE) receive more bank loans and invest more than non-SOEs. However, state-owned enterprises (SOE) have weaker relationships between bank loans and firm profitability and between investment expenditure and investment opportunities than non-SOEs.…”