New working paper by Prof. Huang, Prof. Panizza and Prof. Pagano on the adverse effect of local public debt issuance on private firm investment in Chinese cities between 2006 and 2013.
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.