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Public Debt and Private Firm Funding: Evidence from Chinese Cities

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  • Huang, Yi
  • Pagano, Marco
  • Panizza, Ugo

Abstract

In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing firms by tightening their funding constraints, while it did not affect state-owned and foreign firms. 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 firms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative effect on investment by private firms in industries more dependent on external funding. Finally, in cities with high government debt, firm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the firm's likelihood of being credit-constrained. Altogether, these results suggest that the massive public debt issuance associated with the post-2008 fiscal stimulus curtailed private investment thus weakening China's long-term growth prospects.

Suggested Citation

  • Huang, Yi & Pagano, Marco & Panizza, Ugo, 2016. "Public Debt and Private Firm Funding: Evidence from Chinese Cities," CEPR Discussion Papers 11489, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11489
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    Cited by:

    1. Chen, Zhuo & He, Zhiguo & Liu, Chun, 2018. "The Financing of Local Government in the People’s Republic of China: Stimulus Loan Wanes and Shadow Banking Waxes," ADBI Working Papers 800, Asian Development Bank Institute.
    2. Yi Huang & Ugo Panizza & Richard Portes, 2018. "Corporate Foreign Bond Issuance and Interfirm Loans in China," NBER Working Papers 24513, National Bureau of Economic Research, Inc.
    3. Chen, Zhuo & He, Zhiguo & Liu, Chun, 2020. "The financing of local government in China: Stimulus loan wanes and shadow banking waxes," Journal of Financial Economics, Elsevier, vol. 137(1), pages 42-71.
    4. Zhu, Xiaodong, 2021. "The varying shadow of China's banking system," Journal of Comparative Economics, Elsevier, vol. 49(1), pages 135-146.
    5. Francesco D'Acunto & Michael Weber & Jin Xie & Michael Weber, 2019. "Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished," CESifo Working Paper Series 7512, CESifo.
    6. Song, Zheng (Michael) & Xiong, Wei, 2018. "Risks in China’s financial system," BOFIT Discussion Papers 1/2018, Bank of Finland, Institute for Economies in Transition.
    7. Bo, Li & Ponticelli, Jacopo, 2020. "Going Bankrupt in China," CEPR Discussion Papers 15007, C.E.P.R. Discussion Papers.
    8. Min Zhang & Yahong Zhang, 2020. "Monetary Stimulus Policy in China: the Bank Credit Channel," Working Papers 2001, University of Windsor, Department of Economics.
    9. Markus K. Brunnermeier & Michael Sockin & Wei Xiong, 2017. "China's Gradualistic Economic Approach and Financial Markets," American Economic Review, American Economic Association, vol. 107(5), pages 608-613, May.
    10. Richard Varghese, 2018. "The Bank Lending Channel A Time-Varying Approach," IHEID Working Papers 10-2018, Economics Section, The Graduate Institute of International Studies.
    11. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    12. Yi Huang & Ugo Panizza & Richard Varghese, 2018. "Does Public Debt Crowd Out Corporate Investment? International Evidence," IHEID Working Papers 08-2018, Economics Section, The Graduate Institute of International Studies.
    13. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    14. Lodge, David & Soudan, Michel, 2019. "Credit, financial conditions and the business cycle in China," Working Paper Series 2244, European Central Bank.

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    More about this item

    Keywords

    China.; credit constraints; Crowding out; investment; Local public debt;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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