Government Deleveraging and the Reverse Crowding-in Effect

Paper

Yang Yao
Author: Yang Yao

Nbr. Publication(s): 1
Position: Professor
Affiliation: CCER & NSD, PKU
Member of PolEconFin since: 03 Jan 2025

We show that government deleveraging causes liquidity squeeze among non-state-owned-enterprise (non-SOE) contractors, an unintended consequence of containing subnational debts. Our empirical analysis exploits China’s top-down deleveraging policy in 2017 that restricts local governments’ borrowing capacity and a purpose-built dataset of listed firms matched with government procurement contracts. Non-SOE contractors experience larger accounts receivable increases, larger cash holding reductions, more share-pledging activities, worse operating performance, and higher probabilities of ownership change than non-contractors. Effects are muted among SOEs, implying that local governments selectively delay payments. Our findings reveal a novel trade credit channel whereby government deleveraging amplifies financial distortions against non-SOEs.

Co-Author(s): Jiayin Hu, Songrui Liu, and Zhu Zong

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