Government Deleveraging and Non-SOE Liquidity Squeeze: Evidence from Subnational Debt and Government Contractors

Abstract

We show that government deleveraging causes liquidity squeeze among non-state-owned-enterprise (non-SOE) contractors, an unintended consequence of containing subnational debts. Our empirical analysis exploits China's top-down deleveraging policy in 2017 that restricts local governments' borrowing capacity and a purpose-built dataset of listed firms matched with government procurement contracts. Non-SOE contractors experience larger accounts receivable increases, larger cash holding reductions, more share-pledging activities, worse operating performance, and higher probabilities of ownership change than non-contractors. Effects are muted among SOEs, implying that local governments selectively delay payments. Our findings reveal a novel trade credit channel whereby government deleveraging amplifies financial distortions against non-SOEs.

Keywords: Government deleveraging, subnational debt, government procurement, state-owned enterprises (SOE), trade credit, corporate liquidity, financial distortions

JEL Classification: H72, H74, G32, G38