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Five-Year Plans, China Finance and Their Consequences

Economic growth of developing countries often relies on strategic support from their governments, who have the ability to utilize their late developing advantages and reduce transaction cost. An important factor influencing corporate finance and economic growth in China lies in its government sponsored industrial policies. Examining China’s strategic five-year plans during 1991-2010, we find that state-owned firms in government supported industries enjoy faster growth in initial public offerings and higher offer prices. Further, they enjoy faster growth in loans granted by major national banks. However, this preferential access to capital by state-owned firms appears to be achieved at the expense of non-state-owned firms which are crowded out. Government support induces moreinvestment but also brings more overinvestment, which mainly comes from the non-state sector. Finally, supported industries have higher stock market returns and cash flow growth that dampen when state ownership increases. However, government supported industries have a higher ratio of non-performing loans.