Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation?
We use firm-level data to identify financial frictions in China and explore the extent to which they can explain firms' saving and capital misallocation. We first document the features of the data in terms of firm dynamics and debt financing. State-owned firms have higher leverage and pay much lower interest rates than non-SOEs. Among privately owned firms, smaller firms have lower leverage, face higher interest rates, and operate with a higher marginal product of capital. We then develop a heterogeneous-firm model with two types of financial frictions, default risk, and a fixed cost of issuing loans. Our model generates endogenous borrowing constraints as banks consider the firm's productivity, asset, and debt when providing a loan. Using evidence on the firm size distribution and financing patterns, we estimate the model and find it can explain aggregate firms' saving and investment and around 50 percent of the dispersion in the marginal product of capital within private firms, which translates into a TFP loss as high as 12%.
We would like to thank the discussants and other participants at the China Meeting of Econometric Society 2014, World Congress of Comparative Economics 2015, SED 2016 Conference, CEA 2016, 2016 Conference at Tsinghua Center for Growth and Institutions, the 2nd Annual BoC-UoT-Rotman Conference on the Chinese Economy, CCER Summer Institute, Asian Meeting of the Econometric Society, and seminar participants at the University of Rochester, University of Toronto, Syracuse University, Hong Kong University, San Francisco Fed, SUNY Buffalo, and City University of New York for their helpful comments and discussions. Special thanks to WestGrid Computing and Center for Integrated Research Computing (CIRC) at the University of Rochester for computational support. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.