Government Credit and International Trade

Abstract

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we analyze how government-subsidized credit affects trade activities. 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 firms in downstream industries. Overall, the increased export amount caused by CDB loans is estimated to account for 1.14% of China’s GDP. We further document two essential mechanisms underlying such CDB credit positive spillovers across the supply chain. First, 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. Second, CDB loans to upstream industries increase accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to exploit exogenous variations of CDB credit. We find that local politicians borrow significantly more from the CDB to fund local focal industries in the early years of their 5-year terms. The turnover cycles are not associated with other local government activities, such as land sales, subsidies, fiscal transfer, tax policies, foreign investments, and loans from other banks.

Keywords: Government Credit, Export, Supply Chain

JEL Classification: E51, F30, G21, G28