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| Industrial Policy and Corporate Entrusted Loan Allocation: Evidence from Listed Manufacturing Firms in China |
| QIAN Xuesong, ZHENG Dechang, DU Li
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| School of Economics, Huazhong University of Science and Technology; Center for Marxist Studies, Huazhong University of Science and Technology |
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Abstract Industrial policies are widely employed by the government as a critical economic practice. However, the economic influence and operational mechanisms of industrial policies have long been topics of debate in academia. Concurrently, Chinese entrusted loans have experienced substantial growth in recent years, making it an important factor that cannot be ignored. The operational mechanisms of entrusted loans have attracted considerable attention from policymakers and scholars. Previous studies have demonstrated that industrial policies can affect the real economy through formal financial channels, such as bank credit and equity financing. However, limited studies have investigated the effect of industrial policies on the real economy through the channel of entrusted loans. This gap in the literature has led to insufficient understanding of whether and how entrusted loans play a role in the transmission process of industrial policies.
On the basis of key industrial policies outlined in the central government's “Five-Year Plan,” this paper investigates the role of entrusted loans in the transmission process of industrial policies. We find that listed manufacturing firms supported by industrial policies issue more entrusted loans than their counterparts without such support. Furthermore, these entrusted loans are predominantly allocated among industries supported by industrial policies mainly through an equity correlation mechanism. The effect of industrial policies on encouraging manufacturing firms to use entrusted loans is more pronounced for firms located in areas with greater government intervention, industries with high-capacity utilization rates, and industries with low independence from external finance. Moreover, we find that contracts between manufacturing firms operating within the same supported industries tend to be less restrictive. They not only issue larger and longer-term entrusted loans but also demand lower interest rates.
This paper contributes to the literature in two main aspects. First, it examines the influence of industrial policies on manufacturing firms. Empirical analyses using Chinese data reveal that industrial policies significantly increase the participation of manufacturing firms in entrusted loan activities. These entrusted loans effectively alleviate the financial constraints faced by small-and medium-sized enterprises (SMEs) operating within policy-supported industries, thus promoting the overall development of these industries. These empirical results fill the gap in the literature by providing evidence of the role of entrusted loans in the transmission process of industrial policies. This expands our understanding of how industrial policies affect the real economy from the perspective of entrusted loans.
Second, this paper contributes to the literature examining the operational mechanisms of entrusted loans. This study reveals that manufacturing firms within policy-supported industries issue entrusted loans to firms in the same industries through an equity correlation mechanism. These entrusted loans are characterized by their large scale, long-term nature, and low-interest rates, highlighting their role in capital allocation in policy-supported industries. Moreover, the advantages of information supervision due to equity correlation can effectively alleviate information asymmetry between lenders and borrowers, resulting in more entrusted loan contracts between equity-related firms. Overall, our results emphasize the role of entrusted loans as a supplement to the formal finance system.
This study offers policy insights on how to streamline the transmission process of industrial policies and fully leverage their potential for financially supporting real enterprises. When implementing industrial policies, the government can provide financial support to firms that serve critical roles in the industrial chain, such as listed manufacturing firms. Explore supply chain finance and other ways to increase the financing support for SMEs.Create a sound business environment for SMEs and increase their bank credit support .
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Published: 02 September 2023
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