Using unique data from the China Development Bank (CDB), this paper examines the effect of government credit onfirm investment, employment, debt, profitability, and survival. I explore the different effects of various types of government credit (infrastructure vs. industry credit). I also trace the effect of government credit across different levels of the supply chain. Using municipal government turnover timing as an instrument of local government borrowing from the CDB, I find that CDB industry loans to SOEs crowd out private firms in the same industry but crowd in private firms in downstream industries. Private firms with better political connections benefit significantly more from upstream CDB industry loans. I also find both SOEs and private firms benefit from CDB infrastructure loans. From 1998 to 2009, on average, a $1 million increase in government industry credit from the CDB led to a $0.52 million decrease in the private sector’s total assets. Local politicians play a role in CDB credit allocation. I find that municipal politicians borrow significantly more during the early period of their terms, and that promotion prospects incentivize politicians to employ the borrowing pattern.
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