Financial constraints in China : firm-level evidence

Abstract

This paper uses a unique micro-level data-set on Chinese firms to test for the existence of a “political-pecking order” in the allocation of credit. Our findings are threefold. Firstly, private Chinese firms are credit constrained while State-owned firms and foreign-owned firms in China are not; Secondly, the geographical and sectoral presence of foreign capital alleviates credit constraints face by private Chinese firms (“crowding out”). Therefore it seems that ongoing restructuring of the state-owned sector and further liberalization of foreign capital inflows in China can help to circumvent financial constraints and can boost the investment of private firmsInvestment cashflow sensitivity; China; firm level data; foreign direct investment