International exposure and the transmission of financial shocks: Evidence from China

Abstract

This study explores the impact of adverse financial shocks on Chinese firms through the bank lending channel and the firm borrowing channel. Using new data linking Chinese firms to their bank(s) and three measures of exposure to international markets, we find that banks with greater exposure to the international markets cut lending more during the financial and sovereign debt crises or when there is a negative shock to OECD GDP growth. Furthermore, state-owned bank loans are more pro-cyclical than private bank loans, and would have been even more pro-cyclical if state-owned banks had not assumed any responsibility for stimulus policies. With regard to the firm borrowing channel, we find that firms with higher weighted aggregate exposure to the international markets through banks have lower net debt, cash, employment, and capital investment during crises or when there is a negative shock to OECD GDP growth. Our results have significant implications for how global financial shocks are transmitted in a regulated financial market such as China.