Credit Allocation Under Economic Stimulus: Evidence from China

Lin Cong, Haoyu Gao, Jacopo Ponticelli and Xiaoguang Yang

The Review of Financial Studies, 2019, vol. 32, issue 9, 3412-3460

Abstract: We study credit allocation across firms and its real effects during China’s economic stimulus plan of 2009–2010. We match confidential loan-level data from the nineteen largest Chinese banks with firm-level data on manufacturing firms. We document that the stimulus-driven credit expansion disproportionately favored state-owned firms and firms with a lower average product of capital, reversing the process of capital reallocation toward private firms that characterized China’s high growth before 2008. We argue that implicit government guarantees for state-connected firms become more prominent during recessions and can explain this reversal. Received August 23, 2017; editorial decision November 15, 2018 by Editor Philip Strahan.

Date: 2019
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