DP7132 Financial Constraints in China: Firm-Level Evidence

Author(s): Sandra Poncet , Walter Steingress , Hylke Vandenbussche

Publication Date: January 2009

Keyword(s): Investment-cashflow sensitivity , China , firm level data , foreign direct investment , pecking-order

JEL(s): E22 , G32

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP7132.asp.asp

This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a 'political-pecking order' in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints faced by private Chinese firms. Thirdly, geographical and sectoral presence of state firms aggravates financial constraints for private Chinese firms ('crowding out'). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firms.