Ownership Networks and Firm Growth: What Do Forty Million Companies Tell Us About the Chinese Economy?

Abstract

The finance–growth nexus has been a central question in understanding the unprecedented success of the Chinese economy. Using unique data on all the registered firms in China, we build extensive firm-to-firm equity ownership networks. At the end of 2017, there are 5.6 million firms belonging to at least one network, and 35 million out-of-network firms. Entering a network and increasing network centrality leads to higher firm growth, with the effect of global centralities on growth strengthening over time. The positive effects of network positions become more pronounced for more productive firms and those with more financial constraints, but weaker for SOEs. Firms’ network positions promote growth through both financing and resource-sharing channels. The 2008-09 global financial crisis (GFC) led to a sudden slump in China’s export sectors and exogenous shocks to the equity networks. Non-export firms connected with the export sectors in the equity networks before the GFC gained centrality relative to firms from the same industries but unconnected with export-sector firms in the networks, and greater centrality resulted in higher growth in the post-GFC period. Our evidence also shows that the RMB 4 trillion stimulus launched by the Chinese government in response to the GFC partially “crowded out” the positive network effects.

Keywords: Ownership network; Equity capital; Firm growth; Bank credit

JEL Classification: G10; G30; L14