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Internal Capital Markets and the Transmission of Exchange-Rate Shocks: Micro Evidence from Chinese Customs Data

Using matched customs and firm data from China, we study how an internal capital market affects firms’ forward-looking product market strategies. We consider an exogenous reform differentially affecting exporters’ access to trade credit from within business groups. We compare pricing and quantity strategies of the same product to the same destination, exported by subsidiaries whose access to internal financing is affected. Exporters with better access stabilize local currency export prices more and realize larger volumes in response to depreciations in destination markets’ currency. We find limited evidence that intragroup credit affects the elasticity of entry to exchange rate changes.