Liquidity Shock,Credit Constraint and the Development of Private vs. State-Owned Enterprises

Based on firm level data for the period of 1998–2007, this paper attempts to explain the growth differences between private enterprises and state-owned enterprises (SOEs) in China, in the context of liquidity shocks, and institutional and financial environments. It is found that (1) when liquidity tightens, the private enterprises face stricter credit constraints than SOEs, which restricts the development of private enterprise; (2) when liquidity becomes abundant, private enterprises face fewer financial limitations and grow much faster than SOEs; (3) the effect of liquidity shocks on the growth rate gap between private enterprises and SOEs has weakened during the period 2002–2007. These findings reveal that the credit discrimination against private enterprises can be mitigated by improving institutional and financial environments, which weaken the effects of liquidity shocks on firm growth.