Credit Allocation Under Economic Stimulus: Evidence from China

Abstract

We study credit allocation across firms and its real effects during China’s economic stimulus plan of 2009–2010. We match confidential loan-level data from the nineteen largest Chinese banks with firm-level data on manufacturing firms. We document that the stimulus-driven credit expansion disproportionately favored state-owned firms and firms with a lower average product of capital, reversing the process of capital reallocation toward private firms that characterized China’s high growth before 2008. We argue that implicit government guarantees for state-connected firms become more prominent during recessions and can explain this reversal. Received August 23, 2017; editorial decision November 15, 2018 by Editor Philip Strahan.

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“…show that during China's economic stimulus, bank credit was allocated disproportionally to financing investment in real estate and heavy industries, which reflected the government's strategy to rely on these industries to stimulate GDP growth. Cong and Ponticelli (2016) also show that new credit was allocated disproportionally more towards state-owned, low productivity firms than to privately-owned, high-productivity firms, reversing the prior trend of efficient reallocation. Using data from -2013, Huang, Pagano, and Panizza (2016 provide evidence that the debt issuance by local governments crowded out investment by private 21 See Bonin and Huang (2001) for how the state dealt with bad loans in the early 2000s; see the State Council (2016) for a recent plan for the Debt-for-Equity Swap.…”

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