State-owned enterprises and entrusted lending: Economic growth and business cycles in China

Abstract

A key economic structure in China is the co-existence of state-owned enterprises (SOEs) being bank-favored firms as well as policy tools, and more productive private firms who can borrow from SOEs through entrusted lending. We explore macroeconomic implications of such a structure in China. Our findings suggest SOEs dampen output volatility at the cost of productivity volatility. In contrast, the healthy development of entrusted lending dampens variations of both output and productivity by reallocating credits between firms. Focusing on the recent growth slowdown in China, we further show conducive effects of entrusted lending on economic growth by mitigating capital misallocation.