Deleveraging backed by fiscal support: The monetary–fiscal policy mix during the deleveraging campaign in China

Abstract

This paper documents China's deleveraging campaign backed by fiscal support during 2015–2018. Employing a continuous difference-in-differences approach, I find that the Chinese government provided more subsidies for firms that were more exposed to the deleveraging shock, which suggests that a monetary–fiscal policy mix was used to realize the soft landing of the deleveraging policy. Further evidence shows that the effect of deleveraging on government subsidies is more pronounced among firms with more severe financial constraints and among firms located in cities with local political leaders having greater short-term promotion pressure. The empirical findings highlight the role of government subsidies as an auxiliary fiscal tool in reducing the short-run economic fluctuation, implying a helping hand from the government out of political incentives. However, the low efficiency in using government subsidies, as a dark side of government intervention, should also receive considerable attention of policy-makers.