Impact of credit guarantee on firm performance: Evidence from China’s SMEs

Using detailed monthly survey data on small and medium-sized enterprises (SMEs) in China, this study uses the total factor productivity (TFP) of SMEs as a proxy variable to investigate credit guarantees’ impacts on the performance of guarantors and guaranteed SMEs. The results reveal that obtaining a credit guarantee can increase an SME’s probability of obtaining bank loans, the loan amount received from banks, R&D expenditures, fixed asset investments, and TFP by 2%, 17.4%, 7.6%, 6.1%, and 5.2%, respectively. Credit guarantees robustly improve the guaranteed SME’s TFP through its R&D expenditures and fixed asset investments. We also found that credit guarantees have a spillover effect among different SMEs. Another critical finding is that providing credit guarantees to other SMEs will not harm the guarantor’s TFP, which is a second alternative to a mutually beneficial situation. These findings suggest that policymakers should focus on credit guarantees’ mitigating effect on financing constraints, which could increase SMEs’ TFP. Hence, policymakers must improve the system design within the credit guarantee market and accelerate the innovation of credit guarantee products in China to promote the high-quality development of SMEs.