Credit Allocation Under Economic Stimulus: Evidence from China

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 19 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 lower average product of capital, reversing the process of capital reallocation towards 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.

Keywords: credit, credit allocation, credit expansion, firms, China, capital, growth, recessions