New working paper: Public Debt and Private Firm Funding: Evidence from Chinese Cities by Yi Huang, Marco Pagano and Ugo Panizza
Abstract: In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing fi
rms by tightening their funding constraints, while it did not affect state-owned and foreign fi
rms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing fi
rms. Instrumental variable regressions indicate that this link is causal. Second, local public debt has a larger negative effect on investment by private
firms in industries more dependent on external funding. Finally, in cities with high government debt, fi
rm-level investment is more sensitive to internal funding, also when this sensitivity is estimated jointly with the firms likelihood of being credit-constrained. Altogether, these results suggest that, by curtailing private investment, the massive public debt issuance associated with the post-2008 fi
scal stimulus sapped long-term growth prospects in China.