Local Crowding Out in China
84 Pages Posted: 11 Aug 2016 Last revised: 14 Nov 2017
Date Written: November 7, 2017
In China, between 2006 and 2013 local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms investment unaffected. We establish this result using a novel, purpose-built dataset for Chinese local public debt. The investment of private firms is inversely correlated with city-level public debt, and this result is stronger for private firms that depend more heavily on external funding. Moreover, in cities where public debt is high, private firmsinvestment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.
Keywords: investment, local public debt, crowding out, credit constraints, China
JEL Classification: E22, H63, H74, L60, O16
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