THE JOURNAL OF FINANCE
VOL. LXXIII, NO. 1
Government Credit, a Double-Edged Sword:
Evidence from the China Development Bank
Using proprietary data from the China Development Bank (CDB), this paper exam-
ines the effects of government credit on ﬁrm activities. Tracing the effects of govern-
ment credit across different levels of the supply chain, I ﬁnd that CDB industrial loans
to state-owned enterprises (SOEs) crowd out private ﬁrms in the same industry but
crowd in private ﬁrms in downstream industries. On average, a $1 increase in CDB
SOE loans leads to a $0.20 decrease in private ﬁrms’ assets. Moreover, CDB infras-
tructure loans crowd in private ﬁrms. I use exogenous timing of municipal politicians’
turnover as an instrument for CDB credit ﬂows.
DIRECTED LENDING PROGRAMS
are pervasive around the world and
are often justiﬁed as a way to support economic development.
A central ques-
tion in the debate on government credit is whether it crowds out or crowds in
private-sector activities. The theoretical literature suggests that government
credit can have many countervailing effects. On the one hand, government
credit that supports high social return projects such as infrastructure can have
positive spillover effects (e.g., Stiglitz (1993)). On the other hand, government
credit might crowd out more productive private-sector investments (e.g., King
and Levine (1993a, 1993b)). Due mainly to data limitations, previous empirical
Hong Ru is with Nanyang Technological University. I am indebted to my advisors Nittai
Bergman, Andrey Malenko, Robert Townsend, and especially Antoinette Schoar for their invalu-
able guidance and encouragement. I thank Jean-Noel Barrot, Stephen Dimmock, Wei Jiang, Mark
Kritzman, Chen Lin, Deborah Lucas, Eric Maskin, Stewart Myers, Tran Ngoc-Khanh, Michael
Roberts (the Editor), Stephen Ross, Zheng Song, Richard Thakor, Wei Wu, an associate editor, and
two anonymous referees. This paper beneﬁted greatly from seminar participants at Cornell, HBS,
MIT, NTU, NUS, Olin, Rotman, SMU, Texas A&M, UIUC, and Wharton for insightful comments.
I thank the discussants and participants at the CFRC, SFS Cavalcade, SEFM, and TCGC confer-
ences. I am also grateful to Gao Jian. I thank Yue Wu and Endong Yang for their excellent research
assistance. I thank all anonymous local government ofﬁcials in China for long and engaging dis-
cussions. I thank Haoyu Gao for help on the CBRC data, Nanyang Technological University for
ﬁnancial support, and the China Development Bank access to its data. To my knowledge, there is
no ﬁnancial or other conﬂict of interest relevant to the subject of this paper. All errors are my own.
Lucas (2014) states that the total amount of credit supported by OECD (Organisation for
Economic Co-operation and Development) governments was recently estimated at several tens of
trillions euros, and Elliott (2011) states that in 2010 the U.S. government’s outstanding commit-
ments for loans and guarantees totaled approximately $2.3 trillion, which was roughly one-third
the size of the loans of all U.S. banks combined.