Examining the liquidity and productivity relationship: Evidence from post-reform China

Tianyu Wang and Kui-Wai Li ()

MPRA Paper from University Library of Munich, Germany

Abstract: A loose financial policy through the provision of loans and fiscal subsidies to state-owned enterprises and households has long been practiced in China, though financial liberalization since the 1980s has revitalized banks and other institutions. By using provincial data, this paper attempts to show the relationship between liquidity and productivity in post-reform China. China’s total factor productivity growth is estimated by the Malmquist index. A total of four regression models have been employed and the findings support the inverse relationship between liquidity and productivity, especially since 2008. China’s loose financial policy that promoted “cash-richness” must be reexamined as excessive liquidity coexisted with decline in total factor productivity. An increase of 1% in liquidity would result in about 0.6% loss in total factor productivity due to market distortion.

Keywords: Total factor productivity; excess liquidity; subsidies; China (search for similar items in EconPapers)
JEL-codes: O47 O5 O53 (search for similar items in EconPapers)
Date: 2018-05-31, Revised 2020-05-31
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