Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/156126
Authors: 
Huang, Yi
Pagano, Marco
Panizza, Ugo
Year of Publication: 
2016
Series/Report no.: 
Graduate Institute of International and Development Studies Working Paper 10-2016
Abstract: 
In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing firms by tightening their funding constraints, while it did not affect state-owned and foreign firms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing firms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative effect on investment by private firms in industries more dependent on external funding. Finally, in cities with high government debt, firm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the firm's likelihood of being credit-constrained. Altogether, these results suggest that, by curtailing private investment, the massive public debt issuance associated with the post-2008 fiscal stimulus sapped long-term growth prospects in China.
Subjects: 
Investment
Local public debt
Crowding out
Credit constraints
China
JEL: 
E22
H63
H74
L60
O16
Document Type: 
Working Paper

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