Dynamics of Trade Credit in China

We use Chinese manufacturing data to show that upstream manufacturing industries received higher credit during the monetary expansion of 2005-2011. However, the higher credit received by upstream industries did not generate a similar increase in ‘trade lending’ to downstream industries, which limited the transmission of the credit expansion to the whole manufacturing sector. We develop a model that formalizes some of the key features of the Chinese economy and show why a credit expansion tilted toward the upstream sector may not fully cascade to the whole economy.