Local Crowding Out in China

​

Yi Huang, Marco Pagano, Ugo Panizza

​

Lead Article, Journal of Finance, 2020

 Best Paper Award, China International Conference in Finance 2017

In China, local public debt issuance between 2006 and 2013 crowded out investment by private manufacturing firms by tightening their funding constraints, while it did not affect state-owned and foreign firms. Using novel data for local public debt issuance, we establish this result in three ways. First, local public debt is inversely correlated with the city-level investment ratio of domestic private manufacturing firms. Instrumental variable regressions indicate that this link is causal. Second, 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, also when this sensitivity is estimated jointly with the firm's likelihood of being credit-constrained. 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.

​

NBER  CEPR

​

In Brief: Voxeu, VoxChina

The Effect of Aggregate Uncertainty on Sectoral Productivity Growth: the Role of Credit Constraints 

​

Sangyup Choi, Davide Furceri, Yi Huang, Prakash Loungani

​

​Journal of International Money and Finance, 2018

We show that an increase in aggregate uncertainty—measured by stock market volatility— reduces productivity growth more in industries that depend heavily on external finance. The mechanism at play is that during periods of high uncertainty, firms that are credit con- strained switch the composition of investment by reducing productivity-enhancing invest- ment—such as on ICT capital—which is more subject to liquidity risks (Aghion et al., 2010). The effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method—a difference-in-difference approach using productivity growth of 25 industries from 18 advanced economies over the period 1985–2010—mitigates concerns with omitted variable bias and reverse causal- ity. The results are robust to the inclusion of other sources of interaction effects, instru- mental variable approaches, and different datasets. The results also hold if economic policy uncertainty (Baker et al., 2016) is used instead of stock market volatility as a mea- sure of aggregate uncertainty.

We estimate the value creation for the stocks purchased by the Chinese government between the period starting with the market crash in mid-June and the market recovery in September. We find that the government intervention increased the value of the rescued firms with a net benefit between RMB 2,464 and 3,402 billion, which is about 5% of the Chinese GDP in 2014. The value creation came from the increased stock demand by the government, the reduced default probabilities, and the increased liquidity. The intervention may come at a long-run cost of creating moral hazard, preventing price discovery, creating more uncertainty, and damaging government credibility. 

​

In Brief: Voxeu

Monetary Policy Transmission With and Without Capital Controls: Micro-Evidence from Colombia

​

Daniel Dias, Yi Huang, Hélène Rey, Miguel Sarmiento

This paper evaluates the effect of capital controls on the transmission of domestic and international monetary policy shocks (IMP) to an emerging market.  Using detailed regulatory data from Colombia, we test whether a mild form of capital controls that restricts short-term cross-border inflows is able to shield the Colombian economy from monetary policy shocks from the euro area and the United States.  We find that, for the period in which Colombian authorities imposed capital controls (2007:Q2 to 2008:Q4), local monetary policy was more effective in controlling loan rates and loan growth, with some heterogeneity across local and foreign banks.  The effects of IMP shocks on loan conditions tend to be greater for loans granted by foreign banks. We also document some variations across banks depending on their dependence on cross-border lending and analyse potential costs of capital controls.

​

NBER Conference: Capital Flows, Risks, and Growth, 2020

​