DP11489 Local Crowding Out in China

Author(s): Yi Huang, Marco Pagano, Ugo Panizza
Publication Date: September 2016
Date Revised: October 2019
Keyword(s): China, credit constraints, Crowding out, investment, Local public debt
JEL(s): E22, H63, H74, L60, O16
Programme Areas: Financial Economics, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11489

In China, between 2006 and 2013, local public debt crowded out the investment of private �rms by tightening their funding constraints, while leaving state-owned �rms' investment una�ected. We establish this result using a purpose-built dataset for Chinese local public debt. Private �rms invest less in cities with more public debt, the reduction in investment being larger for �rms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private �rms'investment is more sensitive to internal cash �ow.