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The Supply Chain Channel of Government Credit Pass-through

Using firm-level data from Chinese Industry Census and loan data from the China Development Bank (CDB), we document two essential mechanisms underlying CDB credit positive spillovers across the supply chain. First, CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces the downstream firms’ costs of goods. Second, CDB loans to upstream industries lead to increased accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to identify exogenous variations of CDB credit.