The State Advances, the Private Sector Retreats: Firm Effects of China’s Great Stimulus Program

It has been argued that the Chinese state sector is advancing at the cost of the private sector. Focusing on publicly listed firms which are divided into state- and private-controlled firms, we investigate preferential access to debt and effects on firm performance. Focusing on the large stimulus program launched in the fall of 2008, we show that state-owned enterprises (SOEs) were better able to maintain their leverage levels and had better access to debt of both short and long maturities compared to privately controlled firms. Furthermore, we show that political connections obtained through political participation help mitigate the discrimination private firms faces in a transition economy where the state controls capital allocation. We also find that preferential access to debt financing does not help SOEs improve firm performance relative to that of private firms. Political participation does however help improve private firms’ performance. These results lend support to the argument that the state is indeed advancing at the cost of the private sector and that SOEs still face a broader set of goals than just profit maximization and/or are less efficient than private firms.