Public Debt and Private Firm Funding: Evidence from Chinese Cities

Using novel data for local public debte, we establish show that local public debt issuance crowd out private investment. After showing that local public debt is inversely correlated with the city-level investment ratio of... [ view full abstract ]

Using novel data for local public debte, we establish show that local public debt issuance crowd out private investment. After showing that local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing �firms, we show that 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, �firm-level investment is more sensitive to internal funding. Altogether, these results suggest that the massive public debt issuance associated with the post-2008 �fiscal stimulus curtailed private investment thus weakening China�s long-term growth prospects.