The bank loan distribution effect of government spending expansion: Evidence from China

Rather than focusing on the spread of enterprises' bank loans, we focus on the impact of government spending expansion on the amount of bank loans obtained by enterprises. We first build a theoretical model to show that there are the demand effect and loan cost effect of government spending expansion on the bank loans and then use the fixed effects approach to analyze the bank loan distribution effect of government spending expansion by using the data of enterprises listed on the China Stock Exchange between 2003 and 2019. Empirical results show that the demand effect plays a leading role for the central government state-owned enterprises (SOEs), helping them obtain more bank loans from banks. In contrast, for private enterprises, the loan cost effect plays a leading role, hurting them in obtaining bank loans from banks. Further research shows that government spending expansion's crowding-in or crowding-out effect differs from Neoclassicism and (new) Keynesianism. This paper provides a new explanation for why the financing problem of private enterprises is getting worse in China. The policy implication is that when the government implements expansionary fiscal policies, it should also provide convenience for private enterprise financing through window guidance to prevent the expansionary fiscal policies from crowding out private enterprise bank loans.