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Local Crowding Out in China

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In China, between 2006 and 2013 local public debt issuance crowded out the investment of private manufacturing firms by tightening their funding constraints, but it did not affect state-owned and foreign .rms. The paper, using novel data for local public debt, establishes this result in three ways. First, local public debt is inversely correlated with city-level investment by domestic private manufacturing firms. Second, this finding is stronger for private firms that depend more heavily on external funding. And third, in cities where public debt is high, firms’ investment is more sensitive to internal cash .ow, even when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained. These results suggest that the enormous increase in local public debt produced by massive debt issuance as part of the post-2008 fiscal stimulus curtailed private investment, thus weakening China’s long-term growth prospects.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 450.

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Date of creation: 30 Jul 2016
Date of revision: 13 May 2017
Handle: RePEc:sef:csefwp:450
Note: A former version of this paper was circulated under the title “Public Debt and Private Firm Funding: Evidence from Chinese Cities”.
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