External finance and trade credit extension in China: does political affiliation make a difference?

Using a dataset of 65,706 Chinese firms over the period 2000-2007, we show that politically affiliated firms benefit from easier access to short-term external finance and extend more trade credit than their non-affiliated counterparts. Furthermore, we observe that the sensitivity of trade credit extension to short-term liabilities, which is largest for private firms producing differentiated goods, decreases with the degree of political affiliation. This suggests that gaining political affiliation contributes not only to alleviating individual firms' financing constraints, but also to reducing the overall level of constraints in the economy through the additional trade credit being made available.