Local Crowding Out in China

86 Pages Posted: 6 Sep 2016 Last revised: 11 Feb 2019

See all articles by Yi Huang

Yi Huang

Graduate Institute of International and Development Studies

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2016

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.

Keywords: China, credit constraints, Crowding out, investment, Local public debt

JEL Classification: E22, H63, H74, L60, O16

Suggested Citation

Huang, Yi and Pagano, Marco and Panizza, Ugo, Local Crowding Out in China (September 2016). CEPR Discussion Paper No. DP11489. Available at SSRN: https://ssrn.com/abstract=2834826

Yi Huang (Contact Author)

Graduate Institute of International and Development Studies ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

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