Government Credit and International Trade

63 Pages Posted: 8 Feb 2019 Last revised: 6 Apr 2021

See all articles by Ning Cai

Ning Cai

China Development Bank

Jinglu Feng

China Development Bank

Yong Liu

China Development Bank

Hong Ru

Nanyang Business School, Nanyang Technological University

Endong Yang

Faculty of Business Administration, University of Macau

Multiple version iconThere are 2 versions of this paper

Date Written: April 2021

Abstract

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we analyze how government-subsidized credit affects trade activities. We find that CDB credit to strategic industries at the top of the supply chain leads to lower prices, higher volumes, and more product varieties and destinations of exports for firms in downstream industries. Overall, the increased export amount caused by CDB loans is estimated to account for 1.14% of China’s GDP. We further document two essential mechanisms underlying such CDB credit positive spillovers across the supply chain. First, CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces downstream firms’ costs of goods. Second, CDB loans to upstream industries increase accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to exploit exogenous variations of CDB credit. We find that local politicians borrow significantly more from the CDB to fund local focal industries in the early years of their 5-year terms. The turnover cycles are not associated with other local government activities, such as land sales, subsidies, fiscal transfer, tax policies, foreign investments, and loans from other banks.

Keywords: Government Credit, Export, Supply Chain

JEL Classification: E51, F30, G21, G28

Suggested Citation

Cai, Ning and Feng, Jinglu and Liu, Yong and Ru, Hong and Yang, Endong, Government Credit and International Trade (April 2021). Available at SSRN: https://ssrn.com/abstract=3324019 or http://dx.doi.org/10.2139/ssrn.3324019

Ning Cai

China Development Bank ( email )

No. 18 Fuxingmennei Street
Xicheng District
Beijing
China

Jinglu Feng

China Development Bank ( email )

No. 18 Fuxingmennei Street
Xicheng District
Beijing
China

Yong Liu

China Development Bank ( email )

No. 18 Fuxingmennei Street
Xicheng District
Beijing
China

Hong Ru (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore
(+65) 67904661 (Phone)

HOME PAGE: http://https://hongru.mit.edu/

Endong Yang

Faculty of Business Administration, University of Macau ( email )

Macau

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