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Credit Misallocation, Endogenous TFP Changes, and Economic Fluctuation in China

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  • Shikong (Scott) Luo

Abstract

In 2009, to cope with the economic slowdown China initiated a large-scale stimulus mainly in the form of bank credit that favored the state-owned sector. Data shows that during the policy easing episodes the credits allocated to the private enterprises (PE) are crowded out by the state-owned enterprises (SOE). I then incorporate SOE and PE into a standard dynamic stochastic general equilibrium (DSGE) model without imposing any ex ante asymmetry to the two sectors. The calibration exercise reveals two findings from a static view: (i) while on average the leverage of SOE is close to that of PE, the credit constraint is much smaller for SOE than PE, consistent with the well accepted views; (ii) the credit misallocation exists in the sense that by deleveraging the SOE can lead to aggregate efficiency gains. On the dynamic side, however, numerical simulations indicate that endogenous TFP changes brought about by the asymmetric credit shocks that are consistent with the data are in fact quantitatively unimportant to economic fluctuations.

Suggested Citation

  • Shikong (Scott) Luo, 2019. "Credit Misallocation, Endogenous TFP Changes, and Economic Fluctuation in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(9), pages 1909-1925, July.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:9:p:1909-1925
    DOI: 10.1080/1540496X.2018.1474735
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    Cited by:

    1. Yixuan Duan & Min Guo & Yixuan Huang, 2022. "Leverage of Local State-Owned Enterprises, Implicit Contingent Liabilities of Government and Economic Growth," Sustainability, MDPI, vol. 14(6), pages 1-23, March.
    2. Zhitao, Wang & Xiang, Ma, 2023. "Financial mismatch on corporate debt default risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    3. Nie, Zi & Ling, Xuan & Chen, Meian, 2023. "The power of technology: FinTech and corporate debt default risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    4. Cao, Jianhong & Law, Siong Hook & Samad, Abdul Rahim Abdul & Mohamad, Wan Norhidayah W., 2023. "Internal mechanism analysis of the financial vanishing effect on green growth: Evidence from China," Energy Economics, Elsevier, vol. 120(C).
    5. Jin, Laiqun & Cao, Kairui & Li, Jiaye & Xu, Qunfang, 2024. "Information infrastructure construction and optimization of resources allocation among firms: Evidence from “Broadband China” strategy," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 36-53.

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