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State-owned enterprises and entrusted lending: A DSGE analysis for growth and business cycles in China

Shuonan Zhang

No 2020-01, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: In this paper, we build and estimate a DSGE model to study how state-owned enterprises (SOEs) and entrusted lending affect growth and business cycles in China. Our model is featured SOEs being bank-favoured firms as well as policy tools, and more productive private firms (POEs) who can borrow from SOEs through entrusted lending. Our findings suggest SOEs dampen output volatility at the cost of TFP volatility. As policy tools, SOEs cause the expense larger than the dampening effect while a reverse case is found for SOEs being bank-favoured firms. In contrast, entrusted lending could dampen variations of both output and TFP by reallocating credits between SOEs and POEs, hence mitigating the cost of SOEs. Focusing on the recent growth slowdown in China, we further show that entrusted lending was conducive to both economic growth and TFP growth by mitigating capital misallocation.

Keywords: State-owned Enterprises; Shadow Lending; Resource Allocation; Financial Friction; Business Cycles (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Pages: 32
Date: 2020-01-17
New Economics Papers: this item is included in nep-ban, nep-cna, nep-dge, nep-fdg, nep-mac and nep-tra
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