The role of SOEs in the transmission of fiscal policy shocks in China

In this paper, we examine the role of state-owned enterprises (SOEs) in the transmission of fiscal policy shocks in China, combining a structural VAR with macroeconomic data and a panel model with firm-level data. We first identify two types of structural fiscal shocks using a Bayesian SVAR with sign restrictions and informative priors on structural elasticities: (1) stimulus shocks, defined as deviations from a policy rule for the budget deficit, and (2) government size shocks, which reflect changes in taxes not necessarily affecting the deficit. These shocks are then incorporated into a local projections framework using firm-level data. Our analysis reveals that SOEs respond fundamentally differently from non-SOEs to fiscal shocks. The results suggest that SOEs are not in strict competition with non-SOEs for government resources: both types of firms benefit from fiscal stimulus, yet SOEs are the ones predominantly subject to crowding out when the size of the government sector expands. At the same time, SOEs in strategic industries consistently receive government support under both government size shocks and tax-cut-led stimulus shocks. Moreover, in nonstrategic sectors, SOE investment exhibits a leading effect over non-SOE investment under tax-cut-led stimulus—an effect that vanishes under spending-led stimulus.