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Does Financial Liberalization Change the Sectoral Allocation of Investments? Macro Evidence from Chinese Provinces

Does financial liberalization affect how investment funds are allocated to competing sectors? We address this question using macro-level panel data for the period of reforms in the Chinese provinces, measuring the sectoral allocation of investments as the ratios of short-term bank loans allocated to agriculture, industry, and commerce, respectively, to total short-term loans. Both least square dummy variables (LSDV) and system estimations using the generalized method of moments (GMM) suggest that financial reform has a significant positive effect on the share of short-term loans allocated to agriculture and a significant negative effect on the share of short-term loans allocated to industry.