Government Credit and International Trade

Abstract

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we find that CDB credit to strategic industries at the top of the supply chain leads to lower prices, higher volumes, and more product varieties and destinations of exports for downstream firms. For mechanisms underlying such positive spillovers, we find that CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces downstream firms’ costs of goods. Moreover, CDB loans to upstream industries increase accounts receivable of upstream firms and accounts payable of downstream firms.

Keywords: Government Credit, Trade Credit, Intermediate Goods

JEL Classification: E50, G21, G28, G30, H81