RU-2018-The Journal of Finance

THE JOURNAL OF FINANCE • VOL. LXXIII, NO.
1 • FEBRUARY 2018
Government Credit, a Double-Edged Sword:

Evidence from the China Development Bank
HONG RU∗
ABSTRACT
Using proprietary data from the China Development Bank (CDB), this paper exam-
ines the effects of government credit on firm activities. Tracing the effects of govern-
ment credit across different levels of the supply chain, I find that CDB industrial loans
to state-owned enterprises (SOEs) crowd out private firms in the same industry but
crowd in private firms in downstream industries. On average, a $1 increase in CDB
SOE loans leads to a $0.20 decrease in private firms’ assets. Moreover, CDB infras-
tructure loans crowd in private firms. I use exogenous timing of municipal politicians’
turnover as an instrument for CDB credit flows.
GOVERNMENT-DIRECTED LENDING PROGRAMS are pervasive around the world and

are often justified as a way to support economic development.1 A central ques-
tion in the debate on government credit is whether it crowds out or crowds in
private-sector activities. The theoretical literature suggests that government
credit can have many countervailing effects. On the one hand, government
credit that supports high social return projects such as infrastructure can have
positive spillover effects (e.g., Stiglitz (1993)). On the other hand, government
credit might crowd out more productive private-sector investments (e.g., King
and Levine (1993a, 1993b)). Due mainly to data limitations, previous empirical
∗ Hong Ru is with Nanyang Technological University. I am indebted to my advisors Nittai
Bergman, Andrey Malenko, Robert Townsend, and especially Antoinette Schoar for their invalu-
able guidance and encouragement. I thank Jean-Noel Barrot, Stephen Dimmock, Wei Jiang, Mark
Kritzman, Chen Lin, Deborah Lucas, Eric Maskin, Stewart Myers, Tran Ngoc-Khanh, Michael
Roberts (the Editor), Stephen Ross, Zheng Song, Richard Thakor, Wei Wu, an associate editor, and
two anonymous referees. This paper benefited greatly from seminar participants at Cornell, HBS,
MIT, NTU, NUS, Olin, Rotman, SMU, Texas A&M, UIUC, and Wharton for insightful comments.
I thank the discussants and participants at the CFRC, SFS Cavalcade, SEFM, and TCGC confer-
ences. I am also grateful to Gao Jian. I thank Yue Wu and Endong Yang for their excellent research
assistance. I thank all anonymous local government officials in China for long and engaging dis-
cussions. I thank Haoyu Gao for help on the CBRC data, Nanyang Technological University for
financial support, and the China Development Bank access to its data. To my knowledge, there is
no financial or other conflict of interest relevant to the subject of this paper. All errors are my own.
1 Lucas (2014) states that the total amount of credit supported by OECD (Organisation for
Economic Co-operation and Development) governments was recently estimated at several tens of
trillions euros, and Elliott (2011) states that in 2010 the U.S. government’s outstanding commit-
ments for loans and guarantees totaled approximately $2.3 trillion, which was roughly one-third
the size of the loans of all U.S. banks combined.
DOI: 10.1111/jofi.12585
275
276 The Journal of FinanceR
studies have only been able to explore the net effects of these opposing forces
and revealed mixed evidence.
Using detailed data from China Development Bank (CDB) on different types
of government credit, in this paper, I aim to separate these countervailing
channels of government credit by tracing its effects across different levels of
the supply chain. The CDB is the largest policy bank in China and lends
mainly to state-owned enterprises (SOEs) in strategic industries (e.g., energy
and mining) and to local governments for infrastructure development. The
CDB loan data contain outstanding loan amounts and issuance amounts at the
province-industry level between 1998 and 2013.2
I document two main findings. First, CDB loans to SOEs crowd out private
firms in the same industry as indicated by decreases in asset investment, em-
ployment, and sales, but they crowd in private firms in downstream industries.
More efficient private firms in downstream industries can benefit significantly
more from CDB credit to upstream SOEs. Second, CDB loans to local gov-
ernment infrastructure projects have positive (crowding-in) effects on private
firms’ activities. By disentangling the different forces of government credit
in China, this analysis sheds light on the mixed results of previous studies
regarding the net effects of aggregate government credit.
To establish the causal effects of CDB credit on firm activities, I exploit
exogenous variation in CDB credit flows using predetermined political turnover
cycles of municipalities in China, which occur every five years on average. This
allows me to alleviate the concern that the CDB endogenously targets areas
with specific economic needs for credit. For example, the CDB may maximize
spillover effects by strategically lending to industries in which downstream
private firms have high growth potential. In particular, I use the predicted
timing of municipal government turnover as an instrument for CDB loans.
In China, city secretaries are appointed and typically serve a five-year term.3
Moreover, cities in China have their own five-year turnover cycles. This allows
me to exploit variation in different five-year cycles across cities. Instead of using
actual turnover cycles, I take the first year of the secretary in the previous
term and add five years to calculate the predicted first year of the current city
secretary.4 These predetermined predicted municipal turnover cycles depend
solely on past information and hence are not affected by current economic
factors (e.g., local GDP, employment, and income).
I begin the analysis by regressing the amounts that cities borrow from the
CDB on the predicted turnover cycles. I find a “zig-zag” borrowing pattern in
most cities whereby city secretaries borrow significantly more from the CDB
during their predicted first year and decrease borrowing monotonically as their
2 I categorize CDB loans into two groups: industrial loans to firms and loans to infrastructure
projects. Among CDB industrial loans to manufacturing firms, approximately 95% go to SOEs.
I consider CDB industrial loans as SOE loans in this paper. See the more detailed discussion in
Section II.A.
3 In China, the political leader of a municipal government is called the Secretary of the Municipal
Committee of the Communist Party of China (CPC) (equivalent to a mayor in the United States).
4 I follow the strategy in Shue and Townsend (2014) of using predicted cycles as instruments.
Government Credit, a Double-Edged Sword: 277
terms progress. Borrowing rises again in the predicted first year of the next city
secretary. On average, city secretaries reduce CDB outstanding loan amounts
by 15.4% each year during their tenure. This “zig-zag” borrowing cycle is driven
primarily by career concerns of city secretaries. In China, the promotion of
local politicians depends largely on their GDP performance (e.g., Li and Zhou
(2005)). To increase local GDP quickly over the short term, city secretaries tend
to borrow from the CDB and in turn invest as much and as early as possible
during their terms.
I next investigate the heterogeneous effects of CDB loans on the private
sector across different levels of the supply chain. First, I examine the effects
of CDB industrial SOE loans on private-sector firms in the same industry.
I use city-level turnover timing as an exogenous shock to CDB credit at the
province-industry level. In particular, I identify each city’s largest SOE indus-
try (i.e., focal industry), which does not change much over time.5 I then interact
dummies of the predetermined focal industry in each city with its predicted
turnover cycle. Using these interactions as instruments for CDB province-
industry loan amounts, I perform two-stage least squares (2SLS) analysis.
If the city secretary is in an early year of the term, I consider this a shock
to the province-level CDB loans in the city’s focal industry. In the first-stage
regression, I find that the province-level CDB loan amount in an industry is
41.3% higher when the corresponding city secretary is in the first two years of
the term. In the second-stage regressions, I find that, consistent with the OLS
regression results, a 100% increase in CDB SOE loan amount to the focal in-
dustry leads to a decrease in the assets, employment, and sales of private firms
in the same focal industry and province of 2%, 1.7%, and 4.1%, respectively.
By contrast, increasing CDB SOE loans leads to increases in SOEs’ activities.
Second, I examine the effects of CDB SOE loans in upstream and downstream
industries. Using an input-output matrix for China, for each focal industry I
identify its downstream industries that source the majority of their inputs from
it. On average, each focal industry has 2.3 downstream industries. I find that a
100% increase in CDB loan amount to the focal industry leads to an increase in
the assets, sales, and sales per worker of downstream private firms in the same
province of 3.4%, 2.6%, and 2.6%, respectively. The evidence also suggests that
more efficient private firms capture significantly more benefits from these CDB
upstream industrial loans. In sum, although CDB industrial SOE loans crowd
out private firms in the same industry (i.e., the focal industry), they crowd in
private firms in downstream industries. These opposing effects could explain
the mixed empirical findings in previous studies that use aggregate data on
government credit.
For the exclusion condition of the instruments, I find that other channels
through which the city secretary may influence a city’s business (e.g., borrow-
ing from other banks, selling more land, requesting fiscal transfers, and better
enforcing tax treaties) are not correlated with the turnover cycles. In particular,
5 The distribution of SOE industries across cities is predetermined mainly for historical reasons
and remains stable over time. See a detailed discussion in Section III.C.
the joint F-tests of predicted turnover cycle dummies are not significant in re-
gressions of these other channels. I further find that, for cities with potentially
better access to CDB credit, the effects of the predicted turnover cycles are
significantly more pronounced. These findings, together with CDB SOE loans’
opposing effects on private firms and SOEs in focal industries, alleviate the
concern that political turnover cycles are associated with other unobservable
factors that might affect firm activities (e.g., changes in a city’s investment
opportunities over its turnover cycle).
Moreover, political turnover cycles affect firms not only through CDB SOE
loans but also through CDB infrastructure loans. However, the effects of CDB
SOE loans across different levels of the supply chain are not likely to be con-
founded with the effects of CDB infrastructure loans. First, infrastructure
projects would impact most firms in the area, whereas the crowding-out and
crowding-in effects of CDB SOE loans depend on the industrial levels of the
supply chain. Second, the distributions of CDB infrastructure versus SOE loans
differ across cities. For example, in 2002, for half of the cities, more than 90% of
their CDB loans were issued to SOEs, while the other cities borrowed mainly
for infrastructure. I define the dummy SOECity by setting it equal to one if
the city’s SOE assets ratio is above the median in 1998. Using the interactions
between the predetermined SOECity dummies and the predicted municipal
turnover cycles as instruments, I break down various borrowing patterns of
CDB industrial SOE loans and infrastructure loans in the first stage. In the
second stage, I again find that increasing CDB industrial SOE loans leads to
decreases in private firms’ assets, sales, and sales per worker. By contrast,
increasing CDB infrastructure loans leads to increases in private firms’ as-
sets, employment, debt, and total sales. These opposing effects provide further
evidence that the instruments satisfy the exclusion condition.
Finally, based on the regression coefficients, I perform a back-of-the-envelope
calculation to estimate the overall effects of CDB loans on individual firms. I
multiply the growth of different types of CDB loans (i.e., infrastructure loans,
industrial SOE loans, and upstream loans) by the estimated coefficients. On
average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in pri-
vate firm assets. This indicates that the crowding-out effects are larger than
the crowding-in effects. Moreover, a $1 increase in CDB infrastructure loan
amounts leads to a $0.47 increase in private firms’ assets.
This paper adds to the literature that examines whether government credit
and spending crowds the private sector in or out. As noted above, findings on
this question have been inconclusive in both theoretical and empirical studies.
On the one hand, the “social view” (e.g., Stiglitz (1993)) argues that govern-
ments should allocate funds to high social return projects with positive exter-
nalities when returns from such loans are difficult for private banks to capture.6
On the other hand, many other studies argue that government credit will crowd
6 The social view of government intervention is suggested by Atkinson and Stiglitz (1980), who
argue that SOEs can be justified under market failures (e.g., Stiglitz and Weiss (1981), Greenwald
and Stiglitz (1986)).
out private-sector investment, particularly when the subsidized credit is given

to firms with distorted incentives, such as SOEs (e.g., King and Levine (1993a,
1993b), Demirguc-Kunt and Maksimovic (1998), Rajan and Zingales (1998), La
Porta, Lopez-de-Silanes, and Shleifer (2002)). Previous empirical studies use
aggregate data to estimate the overall net effect of government credit and show
either crowding-in or crowding-out effects.7 The major contribution of this pa-
per is to disentangle these different forces of government credit. The results
suggest that it is important to consider the heterogeneous effects of government
credit across different levels of the supply chain and different types of credit.
Such analysis could help researchers and policy makers fully understand the
economic consequences of government credit.8
This paper also relates to another strand of the literature on political business
cycle. Starting with Nordhaus (1975) and followed by many other studies,
this literature argues that politicians capture firms or use economic policy to
increase their chances of election.9 I show suggestive evidence that politicians’
career concerns play a role in credit allocation in China, as they do in some
other countries. This leads to the “zig-zag” borrowing pattern over political
turnover cycles that helps me tease out the exogenous variation in CDB credit
flows to establish the causal effects of government credit, which is another
challenge in the literature.10
The remainder of the paper is organized as follows. Section I provides back-
ground on the CDB and local government debt in China. Section II describes
the data. Section III summarizes empirical analysis and presents the results.
Section IV concludes.
I. Background: The CDB and Local Government Financing in China

A. History of the CDB
The CDB was established in 1994 out of six State Planning Commission
(SPC) Investment Corporations.11 Among policy banks, the CDB is the largest
with US$1.83 trillion total assets in 2015. The CDB’s two main shareholders
7 See, for example, Gale (1991), Schwarz (1992), Ramey and Shapiro (1998), Burnside, Eichen-
baum, and Fisher (2004), Craig, Jackson, and Thomson (2007), Shaffer and Collender (2009),
Cohen, Coval, and Malloy (2011), Banerjee, Duflo, and Qian (2012).
8 The CDB focuses on strategic industries at the top of the supply chain and infrastructure
development. The positive spillover effects of CDB infrastructure credit and credit to upstream
industries are consistent with the “social view” of government credit.
9 See, for example, MacRae (1977), Kornai (1979), Alesina and Sachs (1988), and Shleifer and
Vishny (1994).
10 Many empirical studies use political turnover cycle as a source of exogenous variation to
identify causal effects (e.g., Sapienza (2004), Dinc (2005), Khwaja and Mian (2005), Bertrand et al.
(2007), Cole (2009), Dinc and Gupta (2011), Carvalho (2014)).
11 The SPC is under the Chinese State Council and has broad administrative and planning
control over the Chinese economy. These six Investment Corporations were policy institutions
established in the late 1980s as long-term investment instruments on behalf of the government.
are the Ministry of Finance and the China Investment Corporation.12 The CDB
can thus be viewed as an extension of the government’s fiscal function.
The CDB is fully state-owned, which is similar to state-owned commercial
banks such as the ICBC, CCB, BOC, and ABC, but the CDB’s lending strategy
distinguishes it from commercial banks.13 The CDB typically covers infrastruc-
ture sectors and uncontested markets in which commercial banks have little
interest for three possible reasons. First, the CDB’s mandate locates the bank
in policy-related areas. In particular, the main role of the CDB is to grant
subsidized credit to infrastructure projects in undeveloped and underdevel-
oped areas in China (such as the provinces in western China) and to SOEs in
strategic industries, whereas commercial banks weigh their businesses more
heavily in the wealthier areas of China (such as the eastern coastal provinces).
Second, as a policy bank, profit maximization is not on the CDB’s agenda; in
contrast, although commercial banks in China are also state-owned, profit is
one of their primary performance targets. Third, the CDB finances its loans by
issuing long-term bonds with sovereign ratings, whereas state-owned commer-
cial banks rely primarily on short-term deposits. Therefore, the CDB engages
in long-term lending that not only caters to infrastructure-sector requirements
but also matches the durations of its assets and liabilities.14
B. Relationship between the CDB and Local Governments

The CDB generally has closer relationships with local governments than
commercial banks do. Since 1989, budgetary law has prohibited local govern-
ments in China from incurring debt. However, under the tax-sharing system,
local governments retain only approximately 30% of tax revenue. As a result,
while local governments are responsible for infrastructure development, they
do not have the money to do so. To solve this dilemma, in 1998 the CDB began
to work with local governments to help them create 100% state-owned com-
panies as their borrowing platforms. Local governments are thus able to use
these companies to borrow from banks off the balance sheet.
In November 2008, commercial banks began to lend to local governments
aggressively, as part of a four-trillion RMB stimulus plan. At the conclusion
of this stimulus program in 2010, many commercial banks pulled back, but
the CDB continued to increase its lending to local governments. Between 2006
and 2013, on average the CDB contributed approximately 50% to 60% of the
outstanding loans of local governments in China. In contrast, on average each
commercial bank in China accounts for less than 3% of total local government
12 The China Investment Corporation is a sovereign wealth fund responsible for managing part
of China’s foreign exchange reserves.

13 ICBC stands for Industrial and Commercial Bank of China; CCB for China Construction
Bank; BOC for Bank of China; and ABC for Agricultural Bank of China.
14 The CDB’s long-term loan rates have remained lower than those of state-owned commercial
banks—and much lower than those of private or shareholding commercial banks. The subsidized
loans from the CDB can thus be viewed as government spending (Lucas (2012)).
debt. Even the big five commercial banks contribute approximately 6% each to
total local government debt (Gao, Ru, and Tang (2016)).
Compared with commercial banks, the CDB is a long-term, stable financial
resource for local governments. This paper focuses on the period from 1998 to
2009, which overlaps the stimulus plan by only one year.15 During the sample
period, the CDB played an important role in local government borrowing, and
local politicians strongly affected CDB credit allocation. Commercial banks also
lend massive amounts to SOEs and typically have close connections with SOE
executives who do not follow five-year turnover cycles, which helps explain why
CDB loans and not commercial bank loans are sensitive to local government
turnover cycles.
II. Data Description

A. CDB Loan Data
The proprietary loan data in this paper, obtained directly from the CDB,
contain both city- and province-level loan data. At the province level, the CDB
data contain monthly aggregate outstanding loan amounts and loan issuances
in 95 industries for each of the 31 provinces in mainland China from 1998
to 2013. The industries include infrastructure sectors (such as road, air, rail
transportation, water supply, and public facilities) and industry sectors (such
as agriculture, tobacco, software, oil refining, and textiles). At the city level,
the CDB data contain annual aggregate outstanding loan amounts and loan
issuances to both infrastructure projects and industrial firms across 310 cities
in China from 1998 to 2010.16 I obtain city- and province-level economic vari-
ables (such as GDP, income per capita, total employment, and fiscal income)
from the China Statistical Yearbook.
Table I presents summary statistics and Table AI in the Appendix pro-
vides detailed variable definitions. For CDB city-level loan data, reported in
Table I, Panel A, the average total outstanding loan amount is 3.2 billion RMB
per city-year. Among these loans, the average outstanding loan amount for
infrastructure is 1.1 billion RMB and the average outstanding loan amount
for industrial firms is 2.1 billion RMB. Panel B of Table I shows that, for
CDB province-industry-level loan data, the average outstanding loan amount
is 0.8 billion RMB per province, industry, and year.17
Figure 1 plots the ratio of city-level infrastructure loans and industrial loans
to total loan amount. For infrastructure loans, the ratio was almost zero from
1998 to 2000, after which it began to increase and the gap between the top
15 I repeat the main analysis in the paper by restricting the sample period to 1998 to 2008; the
results remain the same. Please see Table IAIII in Internet Appendix for details. The Internet
Appendix may be found in the online version of this article.
16 The set of cities does not include Beijing, Shanghai, Tianjin, or Chongqing, which are classified
as provinces.
17 Figure A1 in the Appendix plots the time trend of CDB province- and city-level outstanding
loan amounts.
Table I
Summary Statistics
Panel A provides summary statistics at the city×year level for CDB city-level loan data, municipal
local economic data, and municipal politician profile data. The data cover 310 cities between 1998
and 2010. Panel B provides summary statistics at the province×industry×year level for the CDB
province-level loan data, which cover 31 provinces and 95 industries between 1998 and 2013.
Panel C provides summary statistics at the firm×year level for the Chinese Industrial Census
data between 1998 and 2009. See Table AI for detailed variable definitions.
Panel A: City Data
Variable N Mean SD Min Max
Loan_City 3,605 31.97 69.01 0.00 1,268.20

Issuance_City 3,605 11.31 26.76 0.00 428.79
Loan_INF_City 3,605 10.92 30.37 0.00 593.74
Issuance_INF_City 3,605 4.20 12.21 0.00 195.03
Loan_IND_City 3,605 21.34 51.54 0.00 847.77
Issuance_IND_City 3,605 7.13 18.77 0.00 284.22
ActualTurnover 3,605 2.49 1.32 1.00 6.00
PredictedTurnover 3,605 2.62 1.39 1.00 6.00
GDP 3,587 559.46 782.80 0.00 10,604.48
AvgIncome 3,568 10,799.02 8,047.79 0.00 139,574.00
FiscalIncome 3,587 30.43 60.98 0.00 1,138.31
Employment 3,579 1,108.81 18,000.38 0.00 329,858.30
Age 3,325 50.11 4.22 32.00 62.00
Gender 3,605 0.01 0.10 0.00 1.00
Relation 3,158 0.08 0.28 0.00 1.00
Promotion 3,605 0.38 0.48 0.00 1.00
Panel B: Province Data
Loan_PI 44,733 8.09 43.33 0.00 1,369.09

Issuance_PI 44,733 2.81 16.23 0.00 1,004.12
Loan_Road 496 154.18 163.63 0 744.87
Loan_Rail 496 51.44 102.32 0 1260.99
Loan_Water 496 12.60 23.95 0 203.29
Loan_Tel 496 8.55 41.03 0 419.93
Panel C: Firm Data
LogAssets 2,949,514 9.72 1.48 0.00 20.16

LogWorkers 2,944,543 4.69 1.17 0.00 12.58
LogDebt 2,930,818 8.98 1.73 0.00 19.32
ROA 2,949,502 0.09 0.20 −0.76 2.44
Log(Sales/W) 2,918,158 5.25 1.24 −8.12 17.38
LogSales 2,931,478 9.95 1.46 0.00 19.24
Tax_Corp 1,520,597 19.41 10.24 0.00 61.54
Tax_VAT 1,356,623 15.09 13.92 0.00 86.91
and bottom quartiles of the infrastructure loan ratio widened from 1999 to
2003 but closed a bit after 2003. The bottom panel of Figure 1 reveals simi-
lar patterns for the industrial SOE loan ratio, which indicates that different
cities have different combinations of infrastructure and industrial SOE loans.
Figure 1. Distribution of CDB infrastructure loans versus industrial SOE loans. This
figure plots the distribution of CDB infrastructure loans to total city-level loans (top panel) and the
distribution of CDB industrial loans to total city-level loans (bottom panel) across 310 cities. In-
frastructure includes transportation (e.g., road, railway, airport, bridge, and tunnel), water supply,
energy supply (e.g., gas, electric), telecommunications, and public service (e.g., sewage discharge).
City-level loans do not include province-level projects even if part of such projects may be located
in the city, such as a highway. The solid lines represent the median ratios across 310 cities and
the dashed lines are the top and bottom quartiles of the ratios across 310 cities each year. (Color
figure can be viewed at wileyonlinelibrary.com)
In particular, CDB industrial loan amounts are significantly higher in cities

with more SOEs. These cities with large state-owned sectors borrow relatively
less for infrastructure. The distribution of SOEs across cities is predetermined
by historical factors. For example, Baotou has large rare-earth mining SOEs
because it has rich rare earth resources. I construct the dummy SOECity by
setting it equal to one if the weight of SOE assets in a city was greater than the
median level across all 310 cities in 1998. I then interact this predetermined
dummy with predicted municipal turnover cycles to capture differences in bor-
rowing patterns between infrastructure and industrial SOE loans across cities.
In other words, using this dummy, I explore the exogenous variation in how a
city chooses to allocate CDB credit between infrastructure and industrial SOEs.
The CDB collaborates primarily with local governments to grant credit. CDB
infrastructure loans are lent directly to local governments. For CDB industrial
loans to firms, local governments also play a key role, as most of CDB’s in-
dustrial loans go to local SOEs. The China Banking Regulatory Commission
(CBRC) loan-level data, which cover the 2007 to 2012 period, allow me to exam-
ine the allocation of CDB industrial loans between SOEs and private firms.18
Based on the CBRC loan-level data and Chinese Industry Census (CIC) data,
I find that, among manufacturing firms, approximately 95% of CDB industrial
loans go to SOEs. Only 5% of CDB industrial loans go to private firms. Pri-
vate firms with CDB loans are typically large and have close connections with
the government, and some of these private firms with CDB loans have been
privatized from SOEs. For example, Huawei, the largest telecommunications
equipment manufacturer in China, was state-owned in 1998 and has been bor-
rowing from the CDB. When I exclude these privatized firms from the sample,
only 2% of CDB industrial loans go to the private sector. In sum, the CDB
rarely lends to small entrepreneurs in China, and thus in this paper I consider
CDB industrial loans as SOE loans.
Another caveat in the analysis using aggregate CDB loan data is that only
a few SOEs or small SOEs borrow from the CDB, which might lead to biased
results because aggregate CDB credit to SOEs does not well represent the
majority of SOEs in a certain industry and province. To mitigate this concern,
I use CBRC loan-level data to calculate the coverage of CDB credit at the
industry-province level. In particular, I first merge the CBRC loan data with
CIC manufacturing firm data to get each firm’s outstanding loan amount from
the CDB. I then aggregate the assets of SOEs with outstanding loans from the
CDB and divide by the total assets of all SOEs at the province-industry level.
This ratio is approximately 86%, which means that the majority of the large
SOEs have been borrowing from the CDB. The aggregate outstanding CDB
loan data in this paper provide a good representation of SOEs in China. This
mitigates the concern that the crowding-out and crowding-in effects of CDB
SOE loans come from only a few small SOEs.
B. Politician Profile Data

I manually collect local politicians’ profiles from the Zechen Database and
the Baidu Encyclopedia. The data contain the names of all city mayors and
18 The CBRC loan-level data record all loan issuances from the 19 largest Chinese banks includ-
ing the CDB between 2007 and 2012. This data set has been used in other studies, for example, Ai
et al. (2016) and Gao, Ru, and Tang (2016).
secretaries at the city-month level across all 334 cities in China between 1949
and 2013. The data also contain politician demographics such as gender, age,
and birthplace. In total, the data contain information for 1,227 city secretaries.
I cross-check these data with other sources to ensure their quality. When I
merge the CDB city-level data with politicians’ profiles, I obtain a sample of
310 cities in total (the remaining 24 cities did not receive CDB loans).
In China, the political leader of a municipal government is called the Sec-
retary of the Municipal Committee of the CPC. City secretaries’ terms are
generally five years. The national political turnover cycle is also five years, and
occurs around the National Congress of the CPC. Many cities in China were
built during the 1990s due to the urbanization process. For a new city, the sec-
retary begins the five-year tenure in the year the city was incorporated, which
does not coincide with the national cycle. From 1998 to 2010, 67% of the 310
sample cities are off the national turnover cycle, which allows me to explore
variation in different five-year cycles across cities in China.
During municipal political turnover, since there are no elections in China,
promotion decisions involving local politicians are frequently made by higher
level Communist Party officials (such as province governors). At the end of
these terms, approximately 38% of city secretaries were promoted, 14% of city
secretaries were transferred to other cities for another term as city secretary,
and the remainder were no longer city secretaries for various reasons (e.g.,
retiring, under arrest, or serving as another type of government official). I
construct the dummy Promotion by setting it equal to one if a city secretary was
appointed to a higher position in the political hierarchy at the end of her term.
In China, political turnover itself is endogenous as politicians are assigned by
the CPC instead of being elected by voters. For example, those politicians with
good connections can be assigned to better cities and can borrow more from the
CDB. Notably, the exogenous variation in CDB credit flows I exploit come from
predetermined five-year political turnover cycles rather than from turnover
itself.
C. CIC Data
The firm-level data come from the CIC data collected by the Chinese National
Bureau of Statistics (NBS). The CIC data, which are widely used in many aca-
demic studies (e.g., Hsieh and Klenow (2009) and Song, Storesletten, and Zili-
botti (2011)), cover all manufacturing firms in China with annual sales over five
million RMB (about US$700,000) from 1998 to 2009. The CIC features detailed
annual accounting data and firm characteristics, such as number of workers,
industry categories, locations, registration types, political hierarchies, govern-
ment subsidies, and wages. In total, the CIC contains information on 711,892
firms. The CIC appears to be the most detailed database on Chinese manufac-
turing firms, and the content and quality of the database are both sufficient.
Using the CIC data, I classify firms as SOEs based on their annual regis-
tration types. In particular, I classify two registration types as SOEs: firms
owned by government department and collective-owned enterprises (COEs). In
China, the first type comprises firms in which the majority of shares are owned
by government departments (e.g., State-Owned Assets Supervision and Ad-
ministration Commission, Ministry of Finance, Ministry of Transport), while
COEs comprise firms in which assets are owned collectively by all residents
in a community (e.g., cities, counties, and villages). These COEs are mainly
owned and controlled by local governments. Officially, these two types of firms
are considered public.19 Approximately 9% of private firms in the CIC data
were privatized from SOEs. Consistent with other studies that use the CIC
data, I consider these firms as private firms. In a robustness test, the results of
this paper continue to hold when I reclassify these privatized firms as SOEs.20
Table I, Panel C reports the summary statistics for the CIC data.
III. Empirical Analysis and Results

A. Career Concerns of Local Politicians
Promotion is one of the most important career aspirations of politicians in
China (Maskin, Qian, and Xu (2000)). When China began its economic reforms
in 1978 under Deng Xiaoping, local governments began to play an increasingly
important role in developing the local economy and local government officials
became increasingly accountable for local economic growth. On December 9,
2013, the Organization Department of the Central Committee of the CPC an-
nounced that, from that point forward, local political promotion would depend
on performance on various factors such as environmental protection. Prior to
this change, however, GDP served as the primary measure of local politicians’
performance. Thus, during the sample period of this paper (i.e., 1998 to 2009),
promotions of city secretaries and mayors in China depend largely on local GDP
growth. Many empirical studies find evidence of GDP’s importance for promo-
tion decisions prior to the 2013 change. For example, Li and Zhou (2005) find
that the likelihood of promotion of Chinese provincial leaders increased with
economic performance (i.e., local GDP growth over politicians’ tenure) between
1979 and 1995.
Under this promotion system, local politicians in China are incentivized to
invest in an effort to boost local GDP during their five-year terms. As promotion
decisions for city secretaries are made in the last or second-to-last year of their
term, local GDP growth is typically more heavily weighted in the first three
or four years of their terms because GDP data generally take a few months
to be released. City secretaries therefore have strong incentives to increase
local GDP as much and as soon as possible. Growth in GDP is fueled mainly
by borrowing from the CDB. To verify this hypothesis, I regress the promotion
19 The NBS in China officially categorizes firms into eight types where government-owned and
collective-owned enterprises are considered public firms.
20 In particular, I repeat the analysis in Table V after excluding privatized firms from the private
sector. The results remain the same. Please see Table IAV in Internet Appendix for more details.
probability on the increase in CDB loans using the following Probit model:
Promotioni, j = α + β1 × Loan Increaset,i, j + β2 × Relationi, j

+ β3 × Agei, j + β4 × Genderi + εi , (1)
where Promotioni, j is a dummy variable indicating whether city secretary i

in city j is promoted during the turnover year, and Loan Increaset,i, j is the
logarithm of the increase in CDB loan outstanding from secretary i’s first year
in city j in year t. I set t = 1, 2, 3, 4, 5 to examine the effects of increases in the
CDB loan amount at various points in a city secretary’s term. Relationi, j is a
dummy indicating whether city secretary i in city j is from the same hometown
as the provincial governor, Agei, j is the age of secretary i in city j during the
turnover year, and Genderi is a dummy indicating whether city secretary i is
female. Standard errors are clustered at the city level.
Note that this estimation is informative about the correlation between CDB
credit and local politician promotions; it does not provide evidence on a causal
relation. Table AII shows that CDB loan increases are positively associated
with promotion probabilities, and that this effect is driven primarily by loan
increases during the first two years of a secretary’s term. In columns (1) and (2)
of Table AII, the coefficients on loan increases are 0.102 and 0.087, respectively,
both of which are significant. When I include later years in a secretary’s term
(columns (3) to (5)), the coefficients are lower and less significant. This suggests
that CDB loans in particular taken in the early years of local politicians’ terms
may help their careers. During the most recent 15 years in China, borrowing
from the CDB has been the primary mechanism used by city secretaries to boost
local GDP. Because the loans take time to affect the economy, city secretaries
typically borrow from the CDB as early as possible. This is consistent with
the findings in Li and Zhou (2005) that local GDP growth is an important
determinant of politicians’ promotions in China.
B. CDB Credit Flows and the Timing of Political Turnover

In this subsection, I investigate the effects of the timing of municipal politi-
cian turnover on borrowing from the CDB. Instead of actual turnover cycles, I
employ predicted turnover cycles using past turnover in a city to predict future
city secretary terms. This approach mitigates the concern that the actual tim-
ing of city secretary turnover may be affected by other factors. For example,
new provincial governors tend to replace city secretaries with their own people.
Since a provincial governor with greater political power might be assigned to a
province with better investment opportunities and might have greater access
to CDB credit, the turnover timing of city secretaries in this province may be
correlated with local investment opportunities.
To predict the first years of city secretaries’ terms, I use the following simple
prediction algorithm. For each city secretary’s term, let y be the first year of the
previous city secretary’s term, which is also the turnover year of the previous
cycle. I predict that year y + 5 will be the first year of the current city secretary.
Figure 2. Predicted political turnover of city secretaries in China. This figure plots the
distribution of predicted city secretaries’ term length in China. The data cover 334 cities and 1,227
city secretaries from 1997 to 2013. Term length is calculated at the city-politician level from the
predicted turnover cycles of city secretaries. Approximately 46% of the city secretaries end their
terms in the fifth year.
If there was no previous cycle, I use the actual first year of the city secretary
as the predicted year. For example, to predict the first year of city secretary A,
I begin with the term of secretary A’s predecessor, secretary B. If secretary B
began her term in 2000, I mark 2005 as the predicted first year of secretary A.
Overall, I correctly predict approximately 60% of the cycles’ actual first years.
Approximately 28% of the predictions occur within a year of the actual first year.
Approximately 12% of the predicted first years differ from the actual first years
by more than one year. These incorrect predictions result from actual cycles
with lengths that are less than five years. Figure 2 plots the length of predicted
city secretary terms. Approximately 46% of the predicted terms are five years.
The predicted turnover cycles depend solely on past information and tease
out exogenous variation from the actual turnover cycles that might be corre-
lated with concurrent economic conditions. I use the Cox proportional hazard
model to test whether predicted political turnover timing is affected by fac-
tors such as current local economic conditions and politicians’ demographics.
Table II shows that one-year-lagged local economic conditions (such as GDP,
household income, fiscal income, employment, and the CDB’s outstanding
loans) are uncorrelated with predicted turnover timing. The NationalCycle
dummy is positively related to predicted turnover because 33% of city turnovers
occur during national turnover years. The secretary’s age positively affects pre-
dicted turnover timing because city secretaries are more likely to retire as they
get older. In columns (2) and (3), I separate the sample into those politicians
who are promoted and those who are not (e.g., lateral transfers and demotions).
The results remain the same in these two subsamples.
Next, I explore borrowing patterns over various periods of a city secretary’s
term. The CDB’s primary lending method involves coordinating with local
Table II
City Secretary Turnover Timing and Local Conditions
This table presents results of Cox proportional hazard regressions following Wooldridge (2002).
Data are restricted to 1,106 city secretaries across 310 cites between 1998 and 2010. The origin
and failure events are the starts and ends of each city secretary’s term. Estimated coefficients are
reported in columns (1) to (3). GDP, AvgIncome, FiscalIncome, and Employment are city-level GDP,
income per capita, fiscal income, and total number of employees, respectively. Log(Loan City) is
the logarithm of CDB city-level total loans outstanding. Age is the city secretary’s age. Gender
is a dummy for whether the city secretary is female. NationalCycle is a dummy for whether
the year is a national turnover year (e.g., National Congress Party in 1998, 2003, and 2008).
Column (1) covers the full sample. Column (2) focuses on city secretaries who were not promoted
at their turnover. Column (3) focuses on city secretaries who were promoted at their turnover.
Standard errors are clustered at the city secretary level. T-statistics of the coefficient estimates
are reported in parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and 10% level,
respectively.
(1) (2) (3)

Coefficient Coefficient Coefficient
GDPt−1 −0.142 −0.102 −0.041

(0.090) (0.113) (0.128)
Urban_Incomet−1 0.005 0.004 −0.015
(0.004) (0.006) (0.011)
Fiscal_Incomet−1 1.335 −0.278 1.505
(1.019) (1.801) (1.519)
Labort−1 0.410 −5.451 −8.778
(0.269) (3.677) (9.390)
Log(Loan_Cityt−1 ) 0.019 0.028 −0.015
(0.020) (0.027) (0.032)
NationalCycle 0.343*** 0.378*** 0.339***
(0.067) (0.093) (0.110)
Age 0.029*** 0.044*** 0.025*
(0.008) (0.013) (0.014)
Gender 0.055 0.281 0.006
(0.176) (0.364) (0.199)
Observations 2,812 1,686 962
χ2 43.41 47.18 42.45
governments to support infrastructure projects and SOEs. The city secretary

is the top-ranking politician in the city and typically plays a large role during
the lending process. The regression that I employ is as follows:
Log Loan j,t = α + β1 × Year 1i, j,t + β2 × Year 2i, j,t + β3 × Year 3i, j,t
+ β4 × Year 4i, j,t + β5 × Year 5i, j,t + β6 × Year 6i, j,t
+ X × Control j,t−1 + Fixed Effects + ε j,t . (2)
The dependent variable in equation (2), LogLoan j,t , is the logarithm of the CDB
loans outstanding (for industrial SOE loans, infrastructure loans, or total loans)
in city j in year t. The variables Year 1i, j,t , ..., Year 6i, j,t are dummies indicating
those years in which secretary i was in city j in year t. For example, Year 1i, j,t
equals one for the first year secretary i was in city j and zero otherwise.
Control j,t−1 is a matrix of variables that control for economic conditions, such
as GDP, urban income per capita, fiscal income, and the size of the working
population; X is the vector of coefficients on these control variables. The fixed
effects include year fixed effects, which mitigates the concern that national
turnover cycles drive the borrowing patterns; city fixed effects, because cities
are often characterized by unique situations; and secretaries’ personal fixed
effects, because secretaries have their own investment styles. Standard errors
are clustered at the city level.
Table III, Panel A, presents the regression results. Columns (1) to (3) employ
actual turnover cycles. In column (1), the dependent variable is the logarithm
of total CDB city outstanding loans. The dummy Year 1 is the missing cate-
gory. The coefficient on Year 2 is −0.386, with a significance level of 1%, which
implies that on average city secretaries borrow 38.6% less during their second
year than during their first year. The coefficients on Year 3, Year 4, Year 5, and
Year 6 are −0.749, −1.071, −1.429, and −1.900, respectively. Thus, the amount
borrowed from the CDB decreases monotonically in the tenure of a city secre-
tary, that is, city secretaries borrow more heavily as soon as they take office
and then decrease their borrowing monotonically over the duration of their
term. In Panel B, I employ Turnover, which equals the number of years that
the secretary was in the city, as the independent variable. In line with Panel
A, I find that city secretaries’ borrowing from the CDB decreases over their
tenure: on average, if a city secretary stays one more year, borrowing from the
CDB decreases by 36.4%. In columns (2) and (3), I separate loans into infras-
tructure and industrial SOE loans, respectively. Both measures have patterns
similar to that in column (1), with the patterns stronger for industrial SOE
loans.
Columns (4) to (6) in Table III present predicted turnover cycles. The
patterns are similar to actual turnover cycles but are a bit weaker. For
example, on average, if a city secretary stays one more year, borrowing
from the CDB decreases by 15.4%, which is smaller than the effect for
actual turnover cycles because some predicted turnover cycles are incor-
rect (i.e., different from the actual cycles). These prediction errors eliminate
potential endogeneity in turnover timing while lowering the instruments’
power. I use these predicted turnover cycles in all of the empirical exercises
below.
Figure 3 plots the average logarithm of total CDB loans made to cities af-
ter eliminating year, city, and politician fixed effects. There are three national
turnover cycles during my sample period: 1998 to 2002, 2003 to 2007, and
2008 to 2010. I cluster cities using these three cycles and calculate the av-
erage logarithm of total CDB city loan amounts for each year in a predicted
five-year cycle. Figure 3 displays a “zig-zag” pattern during these three cy-
cles. On average, city secretaries borrow significantly more during their pre-
dicted first year in office, with this amount decreasing monotonically over time.
When a new city secretary comes in, borrowing spikes again, in line with the
results in Table III. I also examine borrowing patterns for each individual
Table III
City Secretary Turnover and Borrowing from the CDB
This table presents results for regressions of CDB loan amounts on city secretary turnover cycles
estimated at the city×year level for 310 cities from 1998 to 2010. Panel A presents results for
the OLS regression in equation (2). Year 2 is a dummy for the second year in a city secretary’s
term. Year 3 to Year 6 are defined similarly. The dummy for year 1 is the missing category. In
Panel B, Turnover is the number of years a secretary has served the city. Columns (1) to (3) give
the effects of the actual turnover cycles on city-level CDB total loans outstanding, infrastructure
loans, and industrial SOE loans, respectively. Columns (4) to (6) give the corresponding effects of the
predicted turnover cycles. LogLoan = log(Loan City), which is the logarithm of city-level CDB total
loans outstanding. LogLoanINF = log(Loan INF City), which is the logarithm of infrastructure
loans. LogLoanIND = log(Loan IND City), which is the logarithm of industrial SOE loans. Control
variables include city-level GDP, income per capita, fiscal income, and total number of employees
in year t − 1. All columns also control for year, city, and politician fixed effects. Standard errors
are clustered at the city level. T-statistics of the coefficient estimates are reported in parentheses.
***, **, * indicate statistical significance at the 1%, 5%, and 10% level, respectively.
Actual Turnover Predicted Turnover
Dependent (1) (2) (3) (4) (5) (6)

Variable LogLoan LogLoanINF LogLoanIND LogLoan LogLoanINF LogLoanIND
Panel A: Turnover Dummies
Year_2 −0.386*** −0.109*** −0.330*** −0.182*** −0.117*** −0.149***

(0.031) (0.028) (0.044) (0.030) (0.032) (0.040)
Year_3 −0.749*** −0.240*** −0.703*** −0.303*** −0.176*** −0.336***
(0.042) (0.035) (0.064) (0.034) (0.039) (0.051)
Year_4 −1.071*** −0.351*** −1.001*** −0.473*** −0.231*** −0.495***
(0.063) (0.041) (0.086) (0.037) (0.044) (0.052)
Year_5 −1.429*** −0.467*** −1.341*** −0.635*** −0.343*** −0.645***
(0.108) (0.081) (0.151) (0.071) (0.067) (0.095)
Year_6 −1.900*** −0.691*** −1.668*** −0.729*** −0.451*** −0.680***
(0.144) (0.110) (0.204) (0.116) (0.096) (0.159)
Control&FE Yes Yes Yes Yes Yes Yes
Observations 3,127 2,449 2,727 3,161 2,429 2,759
R2 0.854 0.884 0.756 0.845 0.860 0.764
Panel B: Turnover Years
Turnover −0.364*** −0.122*** −0.338*** −0.154*** −0.080*** −0.160***

(0.020) (0.013) (0.028) (0.012) (0.012) (0.015)
Control&FE Yes Yes Yes Yes Yes Yes
Observations 3,127 2,449 2,727 3,161 2,429 2,759
R2 0.853 0.884 0.756 0.845 0.859 0.763
city and find that most cities follow this “zig-zag” pattern. This result allevi-
ates the concern that certain cities with extreme values drive the results in
Table III.21 As discussed in Section III.A, these patterns are consistent with
the promotion incentives of city secretaries.
21 In Table AIII in the Appendix, I employ the off-national-cycle cities. I find that this subsample
of cities exhibits similar borrowing patterns.

Figure 3. Local government borrowing pattern. This figure plots the logarithm of CDB total
city loan amounts over city secretaries’ predicted turnover cycles. The right vertical axis is the
logarithm of CDB total city loans after removing the year, city, and politician fixed effects from the
regressions. The horizontal axis is the predicted turnover cycle of city secretaries. There are three
national five-year turnover cycles between 1998 and 2012: 1998 to 2002, 2003 to 2007, and 2008 to
2012. The left vertical axis is the number of years that a city secretary serves the city (predicted),
which is from year 1 to year 5. For example, for the first cycle (1 to 5 on the horizontal axis) from
1998 to 2002, I cluster cities by “Years in Office” (1 to 5) from 1998 to 2002 and plot the average
CDB city loan amounts for each “Years in Office” bin. I repeat this procedure for the second cycle
(6 to 10 on the horizontal axis) from year 2003 to 2007. The third cycle (11 to 15 on the horizontal
axis) has only three years from 2008 to 2010, as the CDB city-level loan data are between 1998
and 2010. (Color figure can be viewed at wileyonlinelibrary.com)
C. CDB SOE Loans’ Effects on Firms in the Same Industry

To explore the effects of CDB loans on private firms, I begin by tracing the
heterogeneous effects of CDB industrial loans across different levels of the sup-
ply chain. I use province-industry-level CDB loan data covering 31 provinces
and 95 industries in China. These data offer the advantage of allowing me to
analyze the effects of government credit on various industries. Previous studies
are based mainly on aggregate government credit or spending and hence ex-
plore only the net effects. However, as I discuss in Section II.A, more than 95%
of CDB industrial loans are extended to SOEs. Only 5% of CDB industrial loans
flow to private firms, which typically have government backgrounds. Moreover,
at the province-industry level, as weighted by total assets, approximately 86%
of SOEs have loans outstanding from the CDB. Using these aggregate CDB
province-industry loan data, I capture the effects of CDB credit to major SOEs
on nearby private firms.
In Table IV, I merge CDB province-industry loans outstanding each year
with firm-level CIC data by firms’ locations and industry codes. In OLS re-
gressions, I explore the correlations between CDB loan amounts and a firm’s
asset investment, employment, borrowing, sales, ROA, and sales per worker. I
Table IV
Effects of CDB Loans on Firms (OLS)
This table presents results for regressions of firm activities on CDB loan amounts estimated at
the firm×year level from 1998 to 2009. In Panels A and B, Loan PI is CDB industrial SOE loans
outstanding for each of the 31 provinces and 41 manufacturing industries per year. In Panel A,
the sample is restricted to SOEs in the CIC data. In Panel B, the sample is restricted to private
firms. Controlt−1 includes province-level GDP, income per capita, fiscal income, and total number of
employees in year t − 1. In Panel C, Loan INF City is CDB infrastructure loans outstanding at the
city×year level. The sample is restricted to private firms in the CIC data from 1998 to 2009 across
310 cities. Controlt−1 includes city-level GDP, income per capita, fiscal income, and total number of
employees in year t − 1. All regressions also control for firm fixed effects and year×province fixed
effects. Standard errors are clustered at the firm level. T-statistics of the coefficient estimates are
reported in parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and 10% level,
respectively.
Dependent (1) (2) (3) (4) (5) (6)

Variable LogAssets LogWorkers LogDebt LogSales ROA Log(Sales/W)
Panel A: SOEs
Log(Loan_PI) 0.011*** 0.011*** 0.023*** 0.005* −0.001*** −0.003

(0.002) (0.002) (0.003) (0.003) (0.000) (0.003)
Controlt−1 Yes Yes Yes Yes Yes Yes
Fixed effects Yes Yes Yes Yes Yes Yes
Observations 231,682 232,003 229,696 231,682 225,214 227,342
R2 0.119 0.046 0.076 0.174 0.021 0.206
Panel B: Private Firms
Log(Loan_PI) −0.006*** −0.004*** −0.000 −0.017*** −0.003*** −0.013***

(0.001) (0.001) (0.001) (0.001) (0.000) (0.001)
Observations 756,826 757,033 752,871 755,947 756,820 755,687
R2 0.243 0.014 0.101 0.282 0.030 0.237
Panel C: Infrastructure
Log(Loan_INF_City) 0.013*** −0.004* 0.016*** 0.033*** 0.002*** 0.036***

(0.003) (0.002) (0.003) (0.003) (0.001) (0.002)
Observations 1,022,595 1,022,954 1,016,623 1,022,586 1,021,059 1,021,245
R2 0.210 0.023 0.085 0.278 0.051 0.242
control for lagged local economic variables as well as firm and year×province
fixed effects, which eliminates province-specific time trends. Panel A of
Table IV presents the regression results for SOEs. CDB industrial SOE
loans demonstrate significantly positive correlations with SOEs’ total assets,
employment, debt, and sales. Panel B shows that CDB industrial SOE loans
were negatively correlated with private firms’ total assets, employment, total
sales, ROA, and sales per worker. These results suggest that CDB industrial
SOE loans help SOEs grow, which in turn may crowd out the private-sector
firms in the same industry. Infrastructure loans, in contrast, appear to crowd

in private firms’ activities.
The correlations in Table IV do not constitute evidence of causal effects.
CDB credit flows are not random. For instance, the CDB may choose to
grant credit to SOEs in areas or industries populated by private firms
with relatively poor investment opportunities. Alternatively, the CDB may
maximize spillover effects by selecting infrastructure projects in those re-
gions with good investment opportunities. The CDB has a mandate to grant
credit to SOEs in bottlenecked industries and to infrastructure projects in
areas with upside potential. Without exogenous variation in CDB credit
flows, the direction of private firms’ expected response to CDB credit is
unclear.
To explore the causal effects of CDB loans, I employ 2SLS by exploiting
exogenous variation in CDB credit flows from the predicted political turnover
timing. I first identify each city’s largest SOE industry as a focal industry. In
China, different cities in a given province typically focus on different industries.
This is particularly true for SOEs, which adjust more slowly than private firms.
I therefore aggregate total SOE assets at the city-industry level each year and
select the largest industry in each city as focal industries. On average, only
two cities in a given province focus on the same industry, and cities typically
stick to the same industry over time. Among the 310 sample cities, 42% did
not change focal industries from 1998 to 2009, while 40% changed once, 14%
twice, and only 3% more than twice. Based on these observations, we can view
the focal industries as predetermined.
Next, I interact the predetermined focal industry dummies for each city with
the predicted city-level political turnover cycles. I use these interaction terms to
instrument CDB industry loan amounts and perform 2SLS regressions. More
specifically, if city secretaries are in the earlier parts of their terms, then, based
on the results in Table III, the city typically takes out more CDB industrial
loans for SOEs in the focal industry. I consider this a shock to a province-level
CDB loan in the focal industry (i.e., the largest SOE industry) of this city. For
example, say that city A in province B focuses on focal industry C. If city A’s
current secretary is in the earlier part of her term, I consider this a shock to
the CDB loans of industry C in province B in that year. As cities in a given
province typically focus on different industries, and the focal industry in a city
does not change often over time, if a city borrows more for its SOEs, this should
be reflected in the province-level CDB loan amount for that industry. Formally,
I estimate the following regression:
Log Loan P Ik, p,t = α + β1 × Firstk, p,t + β2 × Secondk, p,t + β3 × Thirdk, p,t
+ β4 × Fourthk, p,t + β5 × Fifthk, p,t + β6 × Sixthk, p,t +
X × Control p,t−1 + Year × ProvinceFE + IndustryFE, (3)
where LogLoan P Ik, p,t is the logarithm of CDB loans outstanding in industry
k, province p, and year t. Firstk, p,t is a dummy variable that equals one if a city
focuses on industry k (focal industry) in province p with a secretary who is in

her first year, Secondk, p,t is a dummy variable that equals one if a city focuses
on industry k in province p with a secretary who is in her second year, and so
on for Thirdk, p,t to Sixthk, p,t . The matrix Control p,t−1 includes lagged GDP, ur-
ban income per capita, fiscal income, and the size of the working population in
province p. I control for province-specific time trends by adding year×province
fixed effects. The regression results are reported in Table AIV. In the first col-
umn of Table AIV, CDB industrial loans are significantly larger if they are for
a focal industry of a city with a secretary in the early part of her term—the
coefficients on Firstk, p,t to Fifthk, p,t are significantly positive and monotoni-
cally decreasing. I also combine the first two and first three years to create
the dummies First–Secondk, p,t and First–Thirdk, p,t . In columns (2) and (3) of
Table AIV, these two dummies also take positive coefficients. On average, a
province borrows 38.6% more from the CDB for focal industries in cities with
secretaries in the first three years of their terms. City secretaries borrow more
for a city’s focal industry during the early parts of their terms, consistent with
the results in Table III.
I also use Firstk, p,t to Sixthk, p,t to instrument LogLoan P Ik, p,t and perform
2SLS regressions of the activities of private firms in the focal industry on the
instrumented logarithm of CDB SOE loans in the same focal industry. I include
the full set of control variables and fixed effects in the first-stage regressions.
The second-stage regression is as follows:
PI
Yl,k, p,t = α + β × LogLoan k, p,t + X × Control p,t−1
+ Year × ProvinceFE + FirmFE + εl,t , (4)
where Yl,k, p,t are the dependent variables of firm l in industry k and province p
in year t, such as the logarithm of total assets, number of workers, total debt,
and sales. I again control for economic condition variables and firm fixed ef-
fects. I also control for year×province fixed effects to eliminate province-specific
time trends. Panel A of Table V presents the 2SLS regression results for pri-
vate firms in the same focal industries. In columns (1) to (6), CDB industrial
SOE loans have a negative effect on private firm total assets, employment,
debt, total sales, ROA, and sales per worker. On average, a doubling of CDB
industrial loans leads to a decrease in assets, employment, total sales, and
sales per worker for private firms in the same industry of 2%, 1.7%, 4.1%,
and 2.6%, respectively. Panel B of Table V presents the 2SLS regression re-
sults for SOEs. Consistent with the OLS results, industrial loans help SOEs
increase total assets, employment, debt, total sales, and sales per worker. On
average, when industrial loans doubled, SOEs in the same industry observe
an increase in assets, employment, debt, total sales, and sales per worker of
17.7%, 13.9%, 21.8%, 13.7%, and 4.4%, respectively. In sum, CDB industrial
loans help SOEs grow larger and sell more but lead private firms to shrink
in size and sell less. Because CDB industrial firm loans are typically made to
Table V
Effects of CDB SOE Loans on Firms in Same Industry (2SLS)
This table presents two-stage least squares regression results using First to Sixth as instrumental
variables for the logarithm of CDB province-level loans outstanding in 41 manufacturing industries
and 27 provinces (excluding Beijing, Shanghai, Tianjing, and Chongqing). In Panel A, the sample
is restricted to private firms in the CIC data from 1998 to 2009. In Panel B, the sample is restricted
to SOEs in the CIC data. Loan PI is CDB loans outstanding in the focal industry, which is at the
province×industry×year level. Controlt−1 includes province-level GDP, income per capita, fiscal
income, and total number of employees in year t − 1. I also control for CDB infrastructure loans
outstanding. All columns control for firm fixed effects and year×province fixed effects. Standard
errors are clustered at the firm level. Cragg-Donald Wald F-statistics for weak identification tests
are reported. T-statistics of the coefficient estimates are reported in parentheses. ***, **, * indicate
statistical significance at the 1%, 5%, and 10% level, respectively.
Dependent (1) (2) (3) (4) (5) (6)

Variable LogAssets LogWorkers LogDebt LogSales ROA Log(Sales/W)
Panel A: Private Firms
Log(Loan_PI) −0.029*** −0.025*** −0.007 −0.060*** −0.005* −0.038***

(0.009) (0.008) (0.013) (0.011) (0.003) (0.010)
Observations 719,989 719,371 715,834 719,140 719,786 717,844
Wald F-stat 643.2 642.5 648.4 643.4 642.3 642.4
Panel B: SOEs
Log(Loan_PI) 0.255*** 0.200*** 0.314*** 0.198*** −0.010** 0.063***

(0.020) (0.018) (0.026) (0.023) (0.004) (0.021)
Observations 230,645 231,657 228,465 225,879 230,628 224,067
Wald F-stat 179.8 185.1 179.5 179.1 179.9 176.6
SOEs, it is not surprising that SOEs become stronger, crowding out the private
sector.22
In Internet Appendix, Table IAI, I also disentangle the effects of CDB SOE
loans on intensive and extensive margins. I define new firms as firms in their
first year of business. Panel A shows that, for incumbent private firms, CDB
industrial SOE loans negatively affect their total assets, employment, debt,
total sales, ROA, and sales per worker. Panel B shows that increases in CDB
SOE loans lead to decreases in the total number of private firms as well as the
number of private firms entering the sector. These results suggest that CDB
SOE loans’ crowding-out effects on private firms in the same industry come
from both the intensive and extensive margins.
22 I repeat the regressions in Table V by controlling for both province×year fixed effects and
industry×year fixed effects. The results reported in Table IAIV of the Internet Appendix are very
similar to those in Table V.
D. CDB SOE Loans’ Spillover Effects on Related Industries

It is well known that China’s economy has grown dramatically over the
past two decades, with the private sector as the primary driver of this growth.
Although government credit crowds out the private sector in the same industry,
it may complement the private sector in related industries. The CDB aids basic
industries such as energy and mining in an effort to help related industries.
Consistent with Stiglitz (1993), loans to basic industries may have positive
spillover effects on other sectors of the economy, which cannot be captured by
commercial banks.
In this subsection, I use an input-output matrix to identify interindustry
relationships and study the spillover effects of government credit. Specifically,
I use the input-output matrix for 2007 from the NBS to define upstream and
downstream industries.23 Note that the input-output matrix has 42 industries,
whereas the CDB classifies its loans into 95 industries. I match these two
industrial classifications by combining CDB industries. For each focal industry
defined in Section III.C, I use the input-output matrix to identify all of the
downstream industries that use the majority of their inputs from the focal
industry. On average, each focal industry has 2.3 downstream industries. At the
firm level, I match each firm in these downstream industries with its upstream
focal CDB industrial SOE loan in the same province. After this merger, I have
a sample of 25 industries from the manufacturing sector.
Using this sample, in Table VI, I run regressions of firms’ activities in down-
stream industries on the instrumented CDB loan amount of the focal industry,
that is, U pstreamLoan. Again, I use city-level turnover dummy variables to
instrument U pstreamLoan and perform 2SLS regressions. The first-stage re-
gression is as follows:
LogUpstreamLoanl,k , p,t = α + β1 × Firstk , p,t + β2 × Secondk , p,t + β3
× Thirdk , p,t + β4 × Fourthk , p,t + β5 × Fifthk , p,t + β6
× Sixthk , p,t + X × Control p,t−1 + Year
× ProvinceFE + FirmFE + εl,t , (5)
where LogUpstreamLoanl,k , p,t is the logarithm of CDB loans outstanding in the
upstream industry of firm l in industry k (i.e., downstream industry), province
p, and year t, k indexes the upstream industry of k. The variable Firstk , p,t
is a dummy equal to one if a city with focal industry k in province p had a
secretary who was in her first year. I define Secondk , p,t to Sixthk , p,t similarly.
The second-stage regression is as follows:

Yl,k, p,t = α + β × LogUpstreamLoan k , p,t + X × Control p,t−1
+ Year × ProvinceFE + FirmFE + εl,t , (6)

23 I use other years’ input-output matrices to double-check the definition of upstream and down-
stream industries and to verify that the interindustry relationships do not change substantially
over time.
Table VI
Effects of Upstream CDB SOE Loans on Firms in Downstream
Industries (2SLS)
This table presents two-stage least squares regression results using First to Sixth as instrumental
variables for the logarithm of CDB province-level loans outstanding in 25 manufacturing industries
(collapsed from 41 CIC manufacturing industries) and 27 provinces (excluding Beijing, Shanghai,
Tianjing, and Chongqing). The sample is restricted to private firms included in the CIC data from
1998 to 2009. Upstream Loan is CDB industrial SOE loans outstanding in a firm’s upstream focal
industry, which is at the province×industry×year level. In Panel B, HighROA is a dummy for
whether the firm’s ROA is above the median across all private firms in the previous year. In Panel
C, Connected is a dummy for whether the private firm’s political hierarchy is above the city level
(i.e., province level or national level); it captures firms’ political connections. I follow Wooldridge
(2002) to include the interaction term in 2SLS. Controlt−1 includes province-level GDP, income
per capita, fiscal income, and total number of employees in year t − 1. I also control for CDB
infrastructure loans outstanding. All columns also control for firm fixed effects and year×province
fixed effects. Standard errors are clustered at the firm level. Cragg-Donald Wald F-statistics for
weak identification tests are reported. T-statistics of the coefficient estimates are reported in
parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and 10% level, respectively.
(1) (2) (3) (4) (5) (6)

Dependent Variable LogAssets LogWorkers LogDebt LogSales ROA Log(Sales/W)
Panel A: Upstream Loans
Log(Upstream_Loan) 0.049*** −0.001 0.008 0.037*** 0.007*** 0.037***

(0.009) (0.005) (0.009) (0.007) (0.002) (0.007)
Observations 804,718 804,853 799,002 803,712 804,709 803,296
Wald F-stat 1,601 1,604 1,593 1,600 1,601 1,602
Panel B: High ROA Firms
Log(Upstream_Loan) −0.006 −0.051*** −0.001 −0.004 0.006*** −0.008

(0.006) (0.005) (0.009) (0.007) (0.002) (0.007)
HighROA −0.130*** −0.072*** −0.161*** −0.174*** −0.002* −0.103***
(0.003) (0.003) (0.005) (0.004) (0.001) (0.004)
Log(Upstream_Loan) 0.131*** 0.085*** 0.106*** 0.158*** 0.002** 0.073***
HighROA (0.003) (0.002) (0.004) (0.003) (0.001) (0.003)
Observations 804,718 804,853 799,002 803,712 804,709 803,296
Wald F-stat 3,388 3,397 3,366 3,388 3,388 3,397
Panel C: Connected Firms
Log(Upstream_Loan) 0.027*** −0.001 0.007 0.037*** 0.007*** 0.038***

(0.006) (0.005) (0.009) (0.007) (0.002) (0.007)
Log(Upstream_Loan) 0.058*** 0.062*** 0.112*** 0.017 −0.021*** −0.045***
Connected (0.019) (0.014) (0.023) (0.019) (0.003) (0.014)
Observations 285,544 283,980 282,245 285,544 275,484 279,226
Wald F-stat 620.1 607.8 602.5 617.9 577.8 590.6
where Yl,k, p,t are the dependent variables of firm l in industry k, province p, and

year t, LogUpstreamLoan k , p,t is the estimated CDB loan to upstream industry

k . k indexes the upstream industry of k. Panel A of Table VI presents the
results for private firms. In general, CDB loans to firms’ upstream industries
help the downstream private sector. In columns (1), (4), (5), and (6), upstream
CDB industrial firm loans significantly positively affect downstream private
firms’ total assets, total sales, ROA, and sales per worker. On average, a dou-
bling of the upstream industrial loans leads to an increase in downstream
private firms’ assets, total sales, and sales per worker of 3.4%, 2.6%, and 2.6%,
respectively.
I also explore what types of private firms in downstream industries can
benefit more from upstream CDB credit. In Table VI, Panel B, I interact
LogUpstreamLoan with the dummy HighROA, which is equal to one if the
firm’s lagged ROA was above the median across all firms in the previous year.
The results show that firms with higher ROA capture more benefits from up-
stream CDB credit. This is consistent with the story that more efficient firms
capture more positive spillover effects from government credit. Moreover, in
Panel C, I interact Log(Upstream Loan) with the dummy Connected, which in-
dicates whether the firm’s political hierarchy is above the city level. In China,
all firms (including private firms) have a political hierarchy level that deter-
mines the level of government that the firm must report to. In other words,
it determines with which level of government the firm is affiliated. For exam-
ple, a city-level firm reports to and is affiliated to a city-level government. The
CIC data classify firms into city, province, and national ones in terms of their
political hierarchy. The dummy Connected is equal to one for province- and
national-level firms. The regression results show that private firms with better
political connections benefit significantly more from upstream loans. The cor-
relation between dummy HighROA and Connected is −0.03, which indicates
that there is little overlap between efficient private firms and connected private
firms. The results in Panels B and C are not confounded with one another. In
sum, CDB upstream loans have positive effects on downstream private firms,
and private firms with connections or with high ROA tend to benefit signifi-
cantly more.
E. Politicians’ Other Channels for Affecting the Local Economy

One concern regarding the instrument is whether the exclusion condition
holds, that is, whether local political turnover cycles affect the economy only
through borrowing from the CDB. In China, local politicians are deeply involved
in economic development, and promotion incentives play a role (e.g., Chen, Li,
and Zhou (2005), Li and Zhou (2005)). The bar for the exclusion condition to
be met is not that city secretaries do not do anything other than borrow from
the CDB. Rather, the exclusion condition requires that the other activities of
city secretaries do not follow the “zig-zag” pattern over the turnover cycle that
CDB credit flows exhibit.
There are several ways that the turnover cycle might affect a local econ-
omy. When a new city secretary arrives at a city, she typically has her own
plans or preferences with regard to developing the local economy, and she
has several tools to do this. For example, a secretary can build business dis-
tricts to attract investment, speed up approvals of city projects, or provide bet-
ter government services. Regardless of her preferred approaches to economic
development, the biggest constraint is limited fiscal income, as local govern-
ments in China retain only 20% to 30% of tax revenue but remain responsible
for constructing infrastructure. Thus, while city secretaries may have many
good projects on their desks, they lack financial resources. Besides by CDB
loans, city secretaries can raise money by borrowing from other banks, by sell-
ing land, and by requesting transfers from the central government. Moreover,
city secretaries can make use of proeconomic programs made by the central
government, such as export tax rebates and corporate tax breaks for foreign
companies and export companies, among others. City secretaries may enforce
these policies disparately. For example, they can simply give tax breaks to more
firms.
To rule out these channels, I use equation (2) and regress outstanding loans
from other banks, the value of developed land amounts, exports, fiscal in-
come, central government transfers, average effective corporate taxes, and
average effective value-added taxes for each city on the dummy variables
Year 1 to Year 6. Data on other banks’ outstanding loan amounts come from
the CBRC loan data set from 2007 to 2009. I control for the same economic
variables and fixed effects as in Table III. Table VII finds no effects of predicted
turnover timing on these other channels. Moreover, the F-tests on the turnover
dummies are not significant, which means that, jointly, the excluded instru-
ments together have no predictive power on these channels. The results in
Table VII therefore suggest that these other channels do not synchronize cycli-
cally with the predicted turnover cycles of city secretaries like CDB loans.
Recall that the exclusion condition is not violated as long as the activities
in these other channels show no “zig-zag” patterns. For example, borrow-
ing from other banks does not violate the exclusion condition as long as
the borrowing amounts do not synchronize with predicted turnover cycles.
As I discuss in Section I.B, commercial banks usually have direct connec-
tions with SOEs and executives of SOEs typically do not follow five-year
turnover cycles. The CDB, in contrast, has a stronger relationship with lo-
cal governments that plays a role in CDB credit allocations. This is one of
the main reasons for the noncyclicality of commercial bank loans shown in
Table VII.
To further support the exclusion condition, in Table VIII I explore various
effects of turnover timing in cities with different CDB loan levels. The hypoth-
esis is that turnover timing should have a stronger effect in cities with more
CDB credit. Rather than use the contemporaneous CDB loan levels, which are
endogenous, here I use the predetermined CDBCity dummy interacted with
turnover cycles. Some cities have long-term collaborations with the CDB and
some do not. The CDB entered different cities at different times. The CDB began
Table VII
Other Channels through Which Politicians Affect the Local Economy
This table repeats the regressions in Table III (i.e., equation (2)) but regress other channels through
which city secretaries can influence the local economy on predicted turnover cycles. The data cover
310 cites between 1998 and 2010. In column (1), the dependent variable is the logarithm of the
city’s loans outstanding from other banks. The data come from the CBRC from 2007 to 2009. In
column (2), Land is the total developed land in each city every year. In column (3), Export is the
total export amount in each city-year. In column (4), Fiscal Income is the total fiscal income in
each city-year. In column (5), Transfer is the amount of fiscal transfers in each city-year. In column
(6), Tax Corp is the average manufacturing firm’s effective corporate tax rate in each city-year. In
column (7), Tax V AT is the average manufacturing firm’s effective value-added tax rate in each
city-year. Controlt−1 includes city level GDP, income per capita, fiscal income, and total number of
employees in year t − 1. All columns also control for year, city, and politician personal fixed effects.
Standard errors are clustered at the city level. The table also reports F-statistics and p-values for
the F-tests on the turnover dummies Year 2 to Year 6. T-statistics of the coefficient estimates are
reported in parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and 10% level,
respectively.
Dependent (1) (2) (3) (4) (5) (6) (7)

Variable Log(OtherLoans) Land Export Fiscal_Income Transfer Tax_Corp Tax_VAT
Year_2 −0.044 −0.009 0.802 −0.387 0.355 −0.038 0.111

(0.092) (0.011) (1.530) (0.608) (0.582) (0.166) (0.348)
Year_3 −0.028 0.002 1.414 −0.855 0.242 0.260 −0.051
(0.112) (0.021) (2.407) (0.838) (0.683) (0.198) (0.315)
Year_4 0.095 −0.006 0.266 −0.212 −0.527 0.166 −0.261
(0.158) (0.016) (0.881) (0.588) (0.541) (0.210) (0.288)
Year_5 0.253 −0.004 1.138 −0.455 −0.418 −0.221 0.058
(0.237) (0.015) (1.664) (0.724) (0.373) (0.305) (0.331)
Year_6 0.031 0.007 0.770 −1.588* −1.136 −0.613 0.066
(0.305) (0.021) (2.476) (0.888) (0.996) (0.476) (0.477)
Controlt−1 Yes Yes Yes Yes Yes Yes Yes
Fixed effects Yes Yes Yes Yes Yes Yes Yes
Observations 861 3,319 3,494 3,499 3,306 3,181 1,819
R2 0.453 0.233 0.409 0.968 0.915 0.513 0.692
F-statistics 0.93 0.64 0.25 1.22 0.42 1.26 0.53
p-values 0.46 0.67 0.94 0.30 0.84 0.28 0.75
to lend to local governments in 1998 and selected those with better relation-
ships. On average, the cities with longer and better connections with the CDB
have been able to borrow more. I set the CDBCity dummy equal to one if the city
borrowed from the CDB in 1998, the beginning of the sample period. Approxi-
mately 30% of the sample cities belong to CDBCity, while the other 70% began
borrowing from the CDB after 1998. In Table VIII, I interact PredictedTurnover
with the dummy variable CDBCity and regress the SOE variables on the in-
teractions. I find that the interaction term PredictedTurnover × CDBCity has
significantly negative coefficients on total assets, employment, debt, and total
sales. These results suggest that the effect of turnover timing is more pro-
nounced when the city has better and longer connections with the CDB, which
means better access to CDB credit.
Table VIII
Effects of Turnover Timing across Cities with Different
Relationships to the CDB
This table presents results for regressions of firm activities on predicted political turnover cycles
across cities with different relationships with the CDB. The sample is restricted to SOEs included
in the CIC data from 1998 to 2009. PredictedTurnover is the number of years that a secretary serves
the city in the predicted turnover cycles. CDBCity is a dummy for whether the city borrowed from
the CDB in 1998. This predetermined dummy captures the relationship between the CDB and
cities. All columns control for year×province fixed effects, firm fixed effects, and politician personal
fixed effects. Controlt−1 includes city-level GDP, income per capita, fiscal income, and total number
of employees in year t − 1. Standard errors are clustered at the firm level. T-statistics of the
coefficient estimates are reported in parentheses. ***, **, * indicate statistical significance at the
1%, 5%, and 10% level, respectively.
(1) (2) (3) (4) (5) (6)

PredictedTurnover 0.004 0.002 0.012 −0.004 0.000 −0.001

(0.008) (0.007) (0.010) (0.010) (0.002) (0.010)
CDBCity 0.091 0.076 0.137 0.089 −0.037** 0.014
(0.063) (0.060) (0.084) (0.074) (0.016) (0.071)
PredictedTurnover× −0.020*** −0.014*** −0.024*** −0.015*** 0.004*** −0.002
CDBCity (0.003) (0.003) (0.004) (0.004) (0.001) (0.004)
Observations 396,910 395,802 392,876 387,132 396,911 382,790
R2 0.112 0.074 0.067 0.151 0.041 0.181
F. Infrastructure Loans versus SOE Loans

In addition to SOE loans, the CDB lends to infrastructure projects.
Table III shows that CDB infrastructure loans also have “zig-zag” patterns
over the predicted political turnover cycles. The results on CDB SOE industrial
loans are hardly driven by infrastructure loans. First, infrastructure projects
are expected to have positive spillover effects on firms in most industries. The
crowding-out and crowding-in effects of CDB SOE loans depend on the indus-
trial levels of the supply chain.
Second, as in Figure 1, the distributions of CDB infrastructure loans and
SOE loans vary across cities. The CDB imposes borrowing constraints on each
city. Those cities with more SOEs typically borrow more CDB SOE industrial
loans and fewer infrastructure loans. For example, Figure 1 shows that, in
2002, for 50% of cities, more than 90% of their CDB loans were for SOEs.
By contrast, for 25% of cities, CDB infrastructure loans comprised more than
90% of their total CDB loan amounts. This distribution is quite stable over
time. Accordingly, I define the dummy SOECity for whether the ratio of total
SOE assets to total private firm assets in a city was above the median level
across 310 sample cities in 1998. I similarly define the dummy INFCity =
(1 − SOECity) to capture non-SOE cities that borrow mainly for infrastructure
projects.
Using the interaction between the predetermined dummy SOECity and pre-
dicted turnover timing, I disentangle the effects of CDB infrastructure loans
and SOE industrial loans. There are two sources of endogeneity: the allocation
of CDB credit across cities and the allocation of CDB credit to infrastructure
projects and SOEs within a city. Table III shows that, although both infras-
tructure loans and industrial SOE loans exhibit “zig-zag” patterns over the
turnover cycle, they have different slopes. CDB SOE loans are more sensitive
to turnover cycles than infrastructure loans. The primary reason for this is that
infrastructure projects are often long term in nature and hence infrastructure
loans have longer maturities than SOE loans. I use the SOECity dummy as a
predetermined predictor to disentangle the different patterns of CDB infras-
tructure loans and industrial SOE loans. In particular, I interact SOECity with
Year 1 to Year 5, and I interact INFCity with Year 1 to Year 5. I then use these
interactions to instrument both CDB infrastructure loans and industrial loans
at the city-year level.
Figure A2 plots the first-stage regression results. Both CDB infrastruc-
ture loans and CDB SOE industrial loans follow decreasing patterns over
both the SOECity × Year and INFCity × Year. In the top panel, as expected,
CDB SOE loans are more sensitive to SOECity × Year interactions (SOE
city) than to INFYear interactions (non-SOE city). By contrast, in the bot-
tom panel, CDB infrastructure loans are more sensitive to INFCity × Year
interactions than to SOECity × Year interactions. These results confirm that
CDB infrastructure loans and SOE loans have different “zig-zag” patterns and
also confirm that sensitivities of CDB SOE loans and infrastructure loans to
turnover cycles vary across cities. Using the interactions between the prede-
termined SOECity predictor and predicted turnover cycles as instruments, I
can identify the distinct causal effects of CDB infrastructure loans and SOE
loans.
Table IX presents the second-stage regression results. CDB infrastructure
loans supplement private firms, but industrial SOE loans crowd out private
firms. In particular, in columns (1) to (6) in Table IX, for private firms, CDB
infrastructure loans increase assets, number of workers, debt, total sales, and
sales per worker. Consistent with previous results, CDB industrial SOE loans
decrease private firm assets, sales per worker, and total sales.
In sum, for the exclusion condition, the concern is that political turnover
cycles affect firm activities via channels other than CDB loans. The opposing
effects of CDB SOE loans and infrastructure loans in Table IX mitigate the
concern that the crowding-in and crowding-out effects of CDB SOE loans on
private firms across different levels of the supply chain (i.e., the results in Ta-
bles V and VI) are driven by CDB infrastructure loans. Moreover, the opposing
effects between different loan types suggest that the political turnover cycles
affect firm activities mainly via CDB loans rather than directly. Similarly, the
opposing effects of CDB industrial SOE loans on private firms versus SOEs
in focal industries (i.e., Table V) suggest that political turnover cycles affect
firms mainly via CDB loan allocations. These asymmetric effects help further
Table IX
Opposing Effects of CDB City Infrastructure Loans versus Industrial
Loans on Private Firms (2SLS)
This table presents two-stage least squares results using interactions between predicted Year 1 to
Year 6 and the dummy SOECity as instrumental variables for both CDB infrastructure annual loan
amounts and CDB industrial SOE annual loan amounts at the city level. In the first stage, I regress
the logarithm of CDB city-level industrial SOE loan amounts on SOEYear 1 to SOEYear 5 and
INFYear 1 to INFYear 5, where SOEYear 1 = SOECity × Year 1, INFYear 1 = INFCity × Year 1,
etc. I control for the same variables and fixed effects as in the second-stage regressions. I perform
the same first-stage regressions on CDB city-level infrastructure loan amounts. Loan INF City
is aggregate CDB loans outstanding for infrastructure at the city×year level. Loan I N D City is
aggregate CDB loans outstanding for industry firms at the city×year level. The sample is restricted
to private firms included in the CIC data from 1998 to 2009 across 310 cities. Controlt−1 includes
city-level GDP, income per capita, fiscal income, and total number of employees in year t − 1.
All columns control for the year×province fixed effects, firm fixed effects, and politician personal
fixed effects. Standard errors are clustered at the firm level. Cragg-Donald Wald F-statistics for
weak identification tests are reported. T-statistics of the coefficient estimates are reported in
parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and 10% level, respectively.
(1) (2) (3) (4) (5) (6)

Log(Loan_IND_City) −0.020* −0.019** 0.037** −0.039*** −0.024*** −0.021**

(0.011) (0.009) (0.015) (0.012) (0.003) (0.010)
Log(Loan_INF_City) 0.135*** 0.028** 0.095*** 0.315*** 0.037*** 0.289***
(0.014) (0.012) (0.021) (0.016) (0.004) (0.015)
Observations 859,086 859,125 854,012 858,221 859,080 857,846
Wald F-stat 1,160 1,148 1,156 1,158 1,159 1,147
mitigate, though they do not eliminate, concerns with respect to the exclusion
condition.
G. Reduced-Form Analysis of Turnover Cycles’ Effects on Firms

In addition to the 2SLS regressions, in Table IAII in the Internet Appendix,
I report results of reduced-form regressions of firm activities on dummies for
predicted politician turnover cycles. In the regressions, Year 1 is the missing
category. Panel A presents the results for SOEs. In column (1), assets of SOEs,
on average, are 1.5% smaller in the second year of a city secretary’s term
than the first year. The coefficients for years three to six are also negative
and decrease monotonically. SOEs’ employment, debt, and sales have “zig-zag”
patterns similar to the pattern of borrowing from the CDB. Indeed, the amount
of CDB loans moves together with SOEs’ activities and performance over the
predicted turnover cycles of city secretaries. This finding is consistent with the
crowding-in effects of CDB credit on SOEs in Table V.
For private firms, I perform the reduced-form regressions above after restrict-
ing the sample to private firms in SOECity. Since CDB infrastructure loans and
industrial SOE loans have opposing effects on private firms, SOECity allows
me to focus on SOE loans’ effects. Table IAII, Panel B shows that, in contrast
to SOEs, private firms’ assets, employment, and sales increase monotonically
over a city secretary’s term. These patterns are in contrast to the “zig-zag” bor-
rowing patterns from the CDB, which suggests that CDB loan amounts move
in the opposite direction from private firms’ activities and performance. This
result is consistent with the crowding-out effects of CDB credit on private firms
in Table V.
Together with the results in Table VII, Table IAII suggests that political
turnover cycles significantly affect firm activities and that these effects are
driven mainly by CDB credit, rather than the other channels considered in
Table VII. Moreover, the asymmetric effects of political turnover cycles between
SOEs and private firms in Table IAII and Table V come mainly from CDB loan
allocations, assuming that political turnover cycles themselves (other than via
CDB loans) have a symmetric effect on all firms. This evidence further supports
the exclusion condition.
H. Overall Effects of Government Credit from the CDB

The analyses above suggest that CDB industrial SOE loans crowd out private
firms in the same industry but crowd in private firms in downstream industries.
Moreover, CDB infrastructure loans help nearby private firms. In this section,
I examine the overall effects of government credit from the CDB.
First, I calculate the net effects of CDB SOE loans. One part of the CDB’s
mandate is to help basic industries. Although CDB industrial loans crowd
out the private sector in the same industry, they help private firms in down-
stream industries grow. I use the estimated coefficients on CDB SOE loans in
Tables V and VI to perform a back-of-the-envelope calculation. In particular, for
CDB SOE loans’ overall effects on private firm assets, the coefficient on CDB
SOE loans on private firms’ total assets is −0.029 in Table V, which means that
a one-unit increase in the logarithm of CDB SOE loans decreases the logarithm
of assets by 0.029 units for each private firm in the same industry and province.
For each private firm each year, I calculate the difference between the loga-
rithm of CDB SOE loans in the firm’s industry and province in the prior year
and the current year. I then multiply this difference by −0.029 to obtain the
estimated percentage change in the private firm’s assets caused by CDB SOE
loans. I also repeat this back-of-the-envelope calculation using the coefficient
of CDB SOE loans on private firms’ total assets in downstream industries in
Table VI.
On average, between 1998 and 2009 a $1 increase in CDB SOE loans out-
standing led to a $0.2 decrease in private firms’ total assets. The crowding-out
effects of CDB SOE loans on private firms in the same industry were larger
than the crowding-in effects on downstream private firms, which makes the net
effects of CDB SOE loans on the private sector negative. When I examine CDB
SOE loans’ net effects over time, I find that they were positive during earlier
years and became negative during later years. For example, between 1998 and
2004, a $1 increase in CDB SOE loans outstanding led to a $0.43 increase in

private firms’ total assets, whereas from 2005 to 2009, a $1 increase in CDB
SOE loans outstanding led to a $0.35 decrease in private firms’ total assets. On
the other hand, CDB infrastructure loans had positive spillover effects on pri-
vate firms. Between 1998 and 2009, a $1 increase in CDB infrastructure loans
outstanding led to a $0.47 increase in private firms’ total assets, on average.
Sales per worker is an important measure of efficiency in China, particularly
in the manufacturing sector. An abundant labor supply means cheap labor
costs, which is one of the most important factors behind China’s dramatic
growth in exports and in the economy as a whole. Most manufacturing firms in
China are thus labor-intensive. Higher sales per worker means that a firm can
do more with fewer workers. From the results in Tables V, VI, and IX, CDB
industrial SOE loans decrease sales per worker for private firms in the same
industry but increase sales per worker for downstream private firms, while
CDB infrastructure loans increase sales per worker for private firms. Based on
these coefficients, I find that, on average, CDB SOE loans decrease sales per
worker by 0.90% for private firms in the same industry but increase sales per
worker by 0.95% for private firms in downstream industries. Overall, these two
forces cancel one another out. By contrast, CDB infrastructure loans increase
sales per worker by approximately 18% for private firms.
I further attempt to shed light on the different effects of CDB credit over
time. Figure 4 plots total CDB loan issuances between 1998 and 2010 for
the top six industries. In 1998, electric power supply and coal mining were
the top two industries, followed by petroleum and natural gas extraction,
oil processing and refining, chemical products, etc. Except for transportation
equipment manufacturing, all of these industries are at the top of the supply
chain; manufacturing firms are typically in the direct downstream industries of
these top industries. CDB’s dominant weight in upstream industries can have
substantial positive spillover effects on downstream industries, which is one
reason industrial credit had positive net effects on the private sector during
earlier years. In 2010, the industries that receive the greatest share of CDB
loans changed. Electric power supply remained the top industry for CDB loan
issuances. However, three of the top six industries were in the manufactur-
ing sector. Electronic equipment manufacturing, which was among the top six
industries back in 1998, ranked third; special equipment manufacturing (e.g.,
equipment for mining, agriculture, medical, and clothing) ranked fourth; and
transportation equipment manufacturing ranked sixth. This change in indus-
try distribution of CDB loans might result in larger crowding-out effects in
manufacturing industries, and smaller spillover effects on downstream indus-
tries. These results might explain why CDB industrial loans had positive ef-
fects on the private sector during earlier years and negative effects during later
years. Over the past 20 years, China has experienced dramatic GDP growth,
and there have been many shortages of energy supply and raw materials from
mining. CDB loans to upstream industries have helped solve these demand
constraints, possibly explaining why CDB industrial loans helped the private
Figure 4. Shifts of CDB industrial loans over time. This figure plots the six industries that
receive the largest CDB credit inflows (i.e., loan issuance). Data are restricted to CDB province-
level industrial loans in 41 manufacturing industries across 31 provinces in China. The top panel
shows CDB loan issuance amounts to the top six industries in 1998. The amount for each industry
is the sum of all CDB loan issuance amounts across 31 provinces in China. The bottom panel shows
CDB loan issuance amounts to the top six industries in 2010. The units are billions RMB.
sector grow faster and become more efficient during earlier years. However,
in later years, the CDB has focused less on basic industries, shifting to other
industries such as electronic equipment.
IV. Conclusion
In this paper, I trace the heterogeneous effects of government credit across
different levels of the supply chain. I also explore the effects of two types of
government credit (infrastructure vs. industrial SOE loans). Using unique and
detailed industrial loan data from the CDB, I find that government credit to
industries, which typically goes to SOEs, helps SOEs expand but crowds out
private firms in the same industry as indicated by decreases in assets, debt,
employment, sales, ROA, and sales per worker. However, CDB industrial loans
help private firms in downstream industries grow. In contrast, government
credit to infrastructure helps private firms expand. These opposing effects
shed light on mixed empirical findings in prior literature on the net effects
of aggregate government credit. To fully understand the effects of government
credit, the different effects across different levels of the supply chain and across
different types of credit must be considered.
The benefits and costs of government credit are central questions in many
countries. In this paper, I provide a detailed analysis of the benefits of govern-
ment credit in the context of China, the second-largest economy in the world.
Development banks are also important in countries other than China, such as
Germany and Korea. In addition, numerous multilateral development banks,
such as the World Bank, play an important economic role across the globe.
Each country has its own industrial supply chain structure. Based on the em-
pirical evidence in this paper, policy makers should consider the different ef-
fects of government credit at different levels of the supply chain when deciding
where to invest. This paper’s findings are therefore important for policy makers
worldwide. Although the direct costs of government credit (such as credit de-
fault) are also essential for evaluating government credit programs, they are
beyond the scope of this paper. In future research, it would be interesting to
value the costs of government loans to further evaluate their costs and benefits.
In China, after decades of rapid economic growth, local government indebted-
ness has recently raised concerns about economic stability and growth. These
risks have significant implications for the global economy. Determining the
relationships between government credit and China’s banking system and
shadow banking system, and risks that government credit in China pose for
other countries worldwide, can improve our understanding of the role of gov-
ernment credit in China in the global economy.
Initial submission: November 22, 2015; Accepted: January 14, 2017

Editors: Bruno Biais, Michael R. Roberts, and Kenneth J. Singleton
Appendix: Additional Results
Table AI
Variable Definitions
Loan City, Issuance City, Loan INF City, Issuance INF City, Loan IND City, and Issuance
IND City are from the CDB city-level data for 310 cities from 1998 to 2010. Loan PI and Issuance PI
are from CDB province-industry-level data from 1998 to 2013 and cover 95 industries across
31 provinces in China. The units are 100 million RMB. GDP, AvgIncome, FiscalIncome, and
Employment are from the National Bureau of Statistics of China for 310 cities from 1998 to
2010. The units are 100 million RMB for GDP, AvgIncome, and FiscalIncome, and 100,000 for
Employment. ActualTurnover, PredictedTurnover, Age, Gender, Relation, Promotion are from the
politician profile data set for 310 cities from 1998 to 2010. LogAssets, LogWorkers, LogDebt, ROA,
Log(Sales/W), LogSales, Tax Corp, and Tax VAT are from the CIC data and cover 711,892 manu-
facturing firms from 1998 to 2009. The units for assets, debt, and sales are thousands RMB.
Loan City Amount of CDB total loans outstanding at the city level.
Issuance City Amount of CDB total loans issued at the city level.
Loan INF City Amount of CDB infrastructure loans outstanding at the city level.
Issuance INF City Amount of CDB infrastructure loans issued at the city level.
Loan IND City Amount of CDB Industrial loans outstanding at the city level.
Issuance IND City Amount of CDB Industrial loans issued at the city level.
ActualTurnover Number of years that a city secretary served in the city during actual
terms.
PredictedTurnover Number of years that a city secretary served in the city during predicted
terms.
Loan PI Amount of CDB loans outstanding at the province×industry level.
Issuance PI Amount of CDB loans issued at the province×industry level.
GDP Amount of annual GDP at the city level.
AvgIncome Annual income per capita at the city level.
FiscalIncome Amount of annual fiscal income at the city level.
Employment Total number of workers at the city level per year.
Age The age of the city secretary.
Gender Dummy for whether the city secretary is female.
Relation Dummy for whether the city secretary was born in the same city as the
province governor.
Promotion Dummy for whether the city secretary was promoted to a higher position
in the government during her turnover. In China, different cities have
different political hierarchies. For example, Shanghai, Beijing,
Chongqing, and Tianjing are at the ministry level (same level as
province).
LogAssets Logarithm of the firm’s total assets in the CIC data.
LogWorkers Logarithm of the firm’s number of employees in the CIC data.
LogDebt Logarithm of the firm’s total debt in the CIC data.
ROA Contemporaneous return on assets. It is calculated by dividing a firm’s
annual earnings by its total assets in the same year.
Log(Sales/W) Logarithm of the firm’s sales per employee in the CIC data.
LogSales Logarithm of the firm’s total sales in the CIC data.
Tax Corp The corporate tax rate of each firm, obtained by dividing corporate taxes
payable by annual income before taxes.
Tax Corp is missing when income before taxes is negative.
(Continued)
Table AI—Continued
Tax VAT The value-added tax rate of each firm, obtained by dividing the
value-added tax payable amount by the annual production value-added.
Tax VAT is missing when production value-added is negative. It covers
all 554,882 firms in the CIC data in 1998, 1999, 2000, 2003, 2005, 2006,
and 2007.
The CIC data do not record the value-added tax payment in 2001, 2002,
2004, 2008, or 2009.
Table AII
City Secretary Promotion and CDB Loans
This table presents the results from Probit regressions of a city secretary’s promotion on CDB loan
amounts. City secretaries’ political hierarchies vary across cities. Secretaries from Beijing, Shang-
hai, Tianjin, and Chongqing are at the ministerial level. Secretaries from 15 cities in China are
at the vice-ministerial level: Dalian, Qingdao, Ningbo, Xiamen, Shenzhen, Haerbing, Changchun,
Shenyang, Jinan, Nanjing, Hangzhou, Guangzhou, Wuhan, Chengdu, and Xian. All others are at
the departmental level. I exclude the ministerial-level cities because they are at the same level
as provinces. Promotion is a dummy that indicates whether a city secretary is promoted based on
their political hierarchy. Log(Loan Increase in 1st year) is the logarithm of the increase in CDB loans
outstanding in the first year of the city secretary’s tenure. Log(Loan Increase in 1st − 2nd year) is
the logarithm of the increase in CDB loans outstanding in the first two years of the city secretary’s
tenure. Age is the age of the city secretary at the end of their term. Relation is a dummy for
whether the city secretary is born in the same city as the province governor. Gender is a dummy
for whether the city secretary is female. Standard errors are clustered at the city level. Z-statistics
of the coefficient estimates are reported in parentheses. ***, **, * indicate statistical significance
at the 1%, 5%, and 10% level, respectively.
(1) (2) (3) (4) (5)

Dependent Variable Promotion Promotion Promotion Promotion Promotion
Log(Loan Increase 0.102***

in 1st year) (0.035)
Log(Loan Increase 0.087**
in 1st–2nd year) (0.034)
Log(Loan Increase 0.055*
in 1st–3rd year) (0.033)
in 1st–4th year) (0.032)
in 1st–5th year) (0.033)
Relation 0.430* 0.457** 0.431** 0.394* 0.426**
(0.237) (0.218) (0.211) (0.207) (0.205)
Age −0.084*** −0.078*** −0.074*** −0.074*** −0.074***
(0.013) (0.013) (0.012) (0.012) (0.012)
Gender 0.617 0.663* 0.477 0.410 0.407
(0.388) (0.388) (0.364) (0.381) (0.381)
Observations 691 758 792 810 812
χ2 54.58 48.75 42.96 43.85 43.70
Table AIII
City Secretary Turnover and Borrowing from the CDB
(Off-National-Cycle Cities)
This table repeats the regressions in Table III, but excludes city secretaries whose turnover cycles
are in the same year as the national turnover cycle (i.e., 1998, 2003, and 2008), that is, the sample
limits to cities with turnover cycles that differ from national cycle. Year 2 is a dummy for the
second year in a city secretary’s term. Year 3 to Year 6 are defined in the same way. The dummy
for year 1 is the missing category. Columns (1) to (3) are for the effect of actual turnover cycle
on the total CDB city loans outstanding, infrastructure loans outstanding, and industrial SOE
loans outstanding, respectively. Columns (4) to (6) are for the effect of predicted turnover cycle.
LogLoan = log(Loan City), which is the logarithm of CDB total loans outstanding at the city-level.
LogLoanINF = log(Loan INF City), which is the logarithm of infrastructure loans outstanding at
the city-level. LogLoanIND = log(Loan IND City), which is the logarithm of industrial SOE loans
outstanding at the city-level. Control variables include city-level GDP, income per capita, fiscal
income, and total number of employees in year t − 1. All columns are controlled by year, city, and
politician fixed effects. Standard errors are clustered at the city level. T-statistics of the coefficient
estimates are reported in parentheses. ***, **, * indicate statistical significance at the 1%, 5%, and
10% level, respectively.
Actual Turnover Predicted Turnover
Dependent (1) (2) (3) (4) (5) (6)

Variable LogLoan LogLoanINF LogLoanIND LogLoan LogLoanINF LogLoanIND
Year 2 −0.086* −0.119*** −0.043 −0.155*** −0.229*** −0.026

(0.047) (0.042) (0.063) (0.036) (0.048) (0.049)
Year 3 −0.137** −0.228*** −0.179** −0.279*** −0.379*** −0.182**
(0.063) (0.045) (0.083) (0.050) (0.082) (0.089)
Year 4 −0.181** −0.358*** −0.207* −0.468*** −0.512*** −0.370***
(0.091) (0.055) (0.119) (0.050) (0.111) (0.094)
Year 5 −0.314** −0.487*** −0.415* −0.665*** −0.729*** −0.466***
(0.154) (0.095) (0.217) (0.078) (0.130) (0.102)
Year 6 −0.579*** −0.728*** −0.611** −0.793*** −0.966*** −0.459***
(0.195) (0.133) (0.278) (0.132) (0.191) (0.164)
Observations 1,686 1,387 1,495 2,108 1,705 1,835
R2 0.810 0.856 0.707 0.827 0.833 0.711
Table AIV
CDB Province-Industry-Level Loan and City Secretary Turnover
(First Stage)
This table presents results of regressions of CDB province-industry loan amounts on the First to
Sixth dummies at the province×industry×year level. The sample is restricted to CDB province-
level industrial loans outstanding in 31 provinces and 41 manufacturing industries from 1998 to
2009. Log(Loan PI) is the logarithm of CDB annual province-industry loans outstanding. First is
a dummy for whether the city secretary is in the predicted first year of her term and the firm is
in the city’s largest SOE industry (i.e., focal industry). Second is a dummy for whether the city
secretary is in the predicted second year of the term and the firm is in the city’s focal industry. The
dummies Third to Sixth are defined similarly. FirstSecond is a dummy for First or Second equals
one. FirstThird is a dummy for First, Second, or Third equals one. Controlt−1 includes city-level
GDP, income per capita, fiscal income, and total number of employees in year t − 1. All columns are
controlled by industry fixed effects and year×province fixed effects. Standard errors are clustered
at the province level. T-statistics of the coefficient estimates are reported in parentheses. ***, **, *
indicate statistical significance at the 1%, 5%, and 10% level, respectively.
(1) (2) (3)

Dependent Variable Log(Loan_PI) Log(Loan_PI) Log(Loan_PI)
First 0.341***
(0.118)
Second 0.285**
(0.105)
Third 0.274***
(0.090)
Fourth 0.260**
(0.115)
Fifth 0.211**
(0.100)
Sixth 0.044
(0.131)
FirstSecond 0.413***
(0.134)
FirstThird 0.386***
(0.119)
Controlt−1 Yes Yes Yes
Fixed effects Yes Yes Yes
Observations 4,445 4,445 4,445
R2 0.564 0.561 0.561
Figure A1. Time trend of CDB outstanding loan amounts. This figure plots the CDB out-
standing loan amounts. The loans are separated into infrastructure loans and loans for industrial
firms. Infrastructure includes transportation (e.g., road, railway, airport, bridge, and tunnel), wa-
ter supply, energy supply (e.g., gas, electric), telecommunications, and public service (e.g., sewage
discharge). The top panel corresponds to city-level loans and the bottom panel to province-level
loans. City-level loans do not include province-level projects even if part of the project is located
in the city, such as a highway. Units are in billions RMB. (Color figure can be viewed at wileyon-
linelibrary.com)
Figure A2. First-stage patterns of CDB SOE loans versus infrastructure loans. This
figure plots regression coefficients for the first-stage regressions in Table IX. The top panel
shows the regression coefficients for the instruments SOECity × Year 1 to SOECity × Year 5 and
(1 − SOECity) × Year 1 to (1 − SOECity) × Year 5 on the CDB SOE loan amount. The bottom panel
shows the regression coefficients for the instruments SOECity × Year 1 to SOECity × Year 5 and
(1 − SOECity) × Year 1 to (1 − SOECity) × Year 5 on the CDB infrastructure loan amount. (Color
figure can be viewed at wileyonlinelibrary.com)
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Supporting Information
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THE JOURNAL OF FINANCE • VOL. LXXIII, NO.

Government Credit, a Double-Edged Sword:

GOVERNMENT-DIRECTED LENDING PROGRAMS are pervasive around the world and

∗ Hong Ru is with Nanyang Technological University. I am indebted to my advisors Nittai

out private-sector investment, particularly when the subsidized credit is given

I. Background: The CDB and Local Government Financing in China

B. Relationship between the CDB and Local Governments

of China’s foreign exchange reserves.

II. Data Description

Panel A: City Data

Variable N Mean SD Min Max

Loan_City 3,605 31.97 69.01 0.00 1,268.20

Panel B: Province Data

Loan_PI 44,733 8.09 43.33 0.00 1,369.09

Panel C: Firm Data

LogAssets 2,949,514 9.72 1.48 0.00 20.16

In particular, CDB industrial loan amounts are significantly higher in cities

B. Politician Profile Data

III. Empirical Analysis and Results

Promotioni, j = α + β1 × Loan Increaset,i, j + β2 × Relationi, j

where Promotioni, j is a dummy variable indicating whether city secretary i

B. CDB Credit Flows and the Timing of Political Turnover

(1) (2) (3)

GDPt−1 −0.142 −0.102 −0.041

governments to support infrastructure projects and SOEs. The city secretary

Actual Turnover Predicted Turnover

Dependent (1) (2) (3) (4) (5) (6)

Panel A: Turnover Dummies

Year_2 −0.386*** −0.109*** −0.330*** −0.182*** −0.117*** −0.149***

Panel B: Turnover Years

Turnover −0.364*** −0.122*** −0.338*** −0.154*** −0.080*** −0.160***

of cities exhibits similar borrowing patterns.

C. CDB SOE Loans’ Effects on Firms in the Same Industry

Dependent (1) (2) (3) (4) (5) (6)

Log(Loan_PI) 0.011*** 0.011*** 0.023*** 0.005* −0.001*** −0.003

Panel B: Private Firms

Log(Loan_PI) −0.006*** −0.004*** −0.000 −0.017*** −0.003*** −0.013***

Log(Loan_INF_City) 0.013*** −0.004* 0.016*** 0.033*** 0.002*** 0.036***

firms in the same industry. Infrastructure loans, in contrast, appear to crowd

focuses on industry k (focal industry) in province p with a secretary who is in

+ Year × ProvinceFE + FirmFE + εl,t , (4)

Dependent (1) (2) (3) (4) (5) (6)

Panel A: Private Firms

Log(Loan_PI) −0.029*** −0.025*** −0.007 −0.060*** −0.005* −0.038***

Log(Loan_PI) 0.255*** 0.200*** 0.314*** 0.198*** −0.010** 0.063***

D. CDB SOE Loans’ Spillover Effects on Related Industries

+ Year × ProvinceFE + FirmFE + εl,t , (6)

(1) (2) (3) (4) (5) (6)

Panel A: Upstream Loans

Log(Upstream_Loan) 0.049*** −0.001 0.008 0.037*** 0.007*** 0.037***

Panel B: High ROA Firms

Log(Upstream_Loan) −0.006 −0.051*** −0.001 −0.004 0.006*** −0.008

Panel C: Connected Firms

Log(Upstream_Loan) 0.027*** −0.001 0.007 0.037*** 0.007*** 0.038***

E. Politicians’ Other Channels for Affecting the Local Economy

Dependent (1) (2) (3) (4) (5) (6) (7)

Year_2 −0.044 −0.009 0.802 −0.387 0.355 −0.038 0.111

(1) (2) (3) (4) (5) (6)

PredictedTurnover 0.004 0.002 0.012 −0.004 0.000 −0.001

F. Infrastructure Loans versus SOE Loans

(1) (2) (3) (4) (5) (6)

Log(Loan_IND_City) −0.020* −0.019** 0.037** −0.039*** −0.024*** −0.021**

G. Reduced-Form Analysis of Turnover Cycles’ Effects on Firms

H. Overall Effects of Government Credit from the CDB

Year_2 −0.386* −0.109* −0.330* −0.182* −0.117* −0.149*

Turnover −0.364* −0.122* −0.338* −0.154* −0.080* −0.160*

Log(Loan_PI) 0.011* 0.011* 0.023*** 0.005* −0.001*** −0.003

Log(Loan_PI) −0.006* −0.004* −0.000 −0.017* −0.003* −0.013***

Log(Loan_INF_City) 0.013*** −0.004* 0.016* 0.033* 0.002* 0.036*

Log(Loan_PI) −0.029* −0.025* −0.007 −0.060*** −0.005* −0.038***

Log(Loan_PI) 0.255* 0.200* 0.314* 0.198* −0.010 0.063*

Log(Upstream_Loan) 0.049* −0.001 0.008 0.037* 0.007* 0.037*

Log(Upstream_Loan) −0.006 −0.051* −0.001 −0.004 0.006* −0.008

Log(Upstream_Loan) 0.027* −0.001 0.007 0.037* 0.007* 0.038*

Log(Loan_IND_City) −0.020* −0.019 0.037 −0.039* −0.024* −0.021**

Year 2 −0.086* −0.119* −0.043 −0.155* −0.229*** −0.026