Summary:
Employment stability and effective monetary policy transmission are central issues in China's macroeconomic governance. Credit expansion is commonly expected to promote employment by easing firms' financing constraints and stimulating investment. However, in production networks, the employment effects of credit may not be confined to the borrowing firm itself. Credit obtained by a core customer can also affect upstream suppliers through supply-chain relationships. Therefore, this paper investigates whether the credit expansion of core customers promotes supplier employment, and explores the mechanisms through which this spillover takes place. This paper develops a “Signal Transmission to Strategic Response” framework within a production network setting. The key argument is that bank credit is not only a financial resource, but also a credible signal. Given that banks screen and monitor borrowers before extending loans, a customer's access to credit can reveal information about its future growth prospects, business stability, and competitiveness. Upstream suppliers observe this signal, update their expectations about future cooperation, and may adjust their employment before actual orders arrive. In this sense, credit expansion is transmitted along supply chains not only through the flow of funds or physical orders, but also through information and expectations. Using matched supplier-customer data from Chinese A-share listed firms over the period of 2007-2024, this paper examines how credit expansion by a supplier's largest listed customer affects the supplier's employment. Supplier employment is measured as the natural logarithm of total employees, while customer credit expansion is measured as the log of bank loans by the primary customer. The baseline specification controls for firm fixed effects, year fixed effects, and lagged firm-level covariates. To address potential endogeneity, the paper constructs a Bartik-style instrumental variable by interacting the customer's initial firm size with city-level credit supply conditions. The empirical results show that customer credit expansion significantly increases supplier employment. This finding remains robust after applying the instrumental variable strategy, using alternative measures of customer credit, and controlling for the supplier's own borrowing. Mechanism tests further support the proposed framework. On the customer side, credit expansion is associated with increased capacity investment and higher market value, consistent with the release of signals about future growth and competitive strength. On the supplier side, suppliers respond by increasing selling expenses and reducing precautionary cash holdings, indicating proactive operational and financial adjustments that lay the groundwork for subsequent employment expansion. The paper further distinguishes the signaling mechanism from contemporaneous order transmission. After controlling for customer's revenue growth, cost growth, and asset growth, the effect of customer borrowing on supplier employment remains significant. This suggests that the employment effect does not rely entirely on real business expansion or increased procurement demand; rather, the information content of customer credit has independent explanatory power. Heterogeneity analysis shows that the effect is stronger among highly customer-dependent, non-state-owned, and labor-intensive suppliers. It is further amplified when the customer occupies a more central position in the production network and when the supplier has stronger business ties with the customer. This indicates that both the credibility of the signal source and the supplier's motivation to respond jointly determine the strength of credit transmission. To evaluate the aggregate employment implications of this micro-level mechanism, this paper embeds the credit shock into a general equilibrium model with production networks and conducts counterfactual simulations based on China's input-output structure. The results show that production networks amplify the employment effects of credit shocks, and that industries with higher network exposure experience larger indirect effects. This macro-level evidence complements the micro-level findings and highlights the structural role of production networks in transmitting credit shocks to employment. This paper contributes to the literature by identifying an information transmission channel that complements the traditional resource allocation view of the credit policy. It extends the analysis of firm employment decisions from a single-firm perspective to a production network perspective, and connects micro-level causal evidence with macro-level counterfactual analysis. The findings suggest that credit policy should not only focus on the borrowing firms themselves, but also consider how credit signals travel through supply chains and affect employment decisions among connected firms. Strengthening supply-chain finance, identifying key firms in production networks, and improving the transmission efficiency of credible credit information may enhance the employment-stabilizing effects of the monetary policy.
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