Credit Tightening, Trade Credit, and Misallocation on Supply Chains
Dr. Wenya WANG
Assistant Professor
School of Finance, Shanghai University of Finance and Economics
When bank credit supply declines, large customers may turn to their small suppliers
for trade credit. This direction of trade credit flow and its real consequences are
underexplored. Using a transaction-level dataset of bank-accepted commercial bills (as
trade-credit payments to suppliers) in China, we find that the 2011–2015 credit tightening
under the loan-to-deposit ratio regulation motivates banks to substitute bill acceptance
for loans. Consequently, smaller, younger, and more productive suppliers
receive less cash payments and cut investments to finance their larger and less productive
customers. The shift from bank credit to trade credit results in a widened capital
return gap between paired suppliers and customers. Our results imply a new channel
through which the bank credit tightening leads to misallocation on supply chains.
