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Public Debt and Private Firm Funding: Evidence from Chinese Cities

Listed author(s):
  • Huang, Yi
  • Pagano, Marco
  • Panizza, Ugo

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11489.

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Date of creation: Sep 2016
Handle: RePEc:cpr:ceprdp:11489
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