Excess liquidity and credit misallocation: evidence from China

摘要

China’s M2/GDP ratio continues to rise despite having reached the highest tier in the world, but there is no consensus on its driving forces. In this paper, we investigate this puzzle empirically, using different levels of data. We first estimate the degree of the excess liquidity in China based on cross-country regressions. Our results show that China’s excess liquidity is 50 percent of that implied by the cross-country benchmark. Province-level evidence shows that credit misallocation between state-owned enterprises (SOEs) and private enterprises (PEs) may lead to credit inefficiency and hence generate excess liquidity. We further validate this finding using manufacturing firm-level data, and show that credit misallocation has deteriorated since the Four Trillion Yuan Stimulus Plan since 2008. These facts unveil more challenges for the ongoing deleveraging campaign and SOE reform.