The state advances, the private sector retreats? Firm effects of China's great stimulus programme

It has been argued that the state sector is advancing at the cost of the private sector in China. To examine this issue, we conduct an empirical analysis in which we exploit the launch of a large stimulus programme in the autumn of 2008. We find that state-owned enterprises (SOEs) are better able to maintain their leverage levels and have better access to both short- and long-term debt compared with private firms after the introduction of the stimulus programme. We also find that preferential access to debt financing does not help SOEs improve their performance. Instead, SOEs perform significantly worse than private firms after the introduction of the stimulus programme. Moreover, political connections obtained through political participation help mitigate the discrimination that private firms face from Chinese banks and help improve firm performance. These results support the conjecture that China's state sector is advancing, with negative consequences for aggregate performance in the economy.