1 Investment Financing in the Transitional China: A Panel Analysis of Chinese Listed Companies

The marked development in stock markets and the commercialisation of banking sector in the course of economic transition may have influenced the investment behaviours of Chinese companies. Using company accounts data in the period of 1998-2004, we estimate an error-corrected accelerator model to analyze how these changes alter the financing decisions on fixed investment of the newly-corporatized Chinese firms. The results show that the market-oriented reform measures that China adopted have influenced the propensity of listed firms to invest by industry, ownership and size. For primary and tertiary industries, we find, as in well-developed market economies, that firms are liquidity constrained in their investment decisions. For secondary industry, the reliance on internal funds increased, consistent with the interpretation that the firms lost privileged access to credit in the course of financial deregulation. Findings support the hypothesis that state-holding structure and associated corporate governance are responsible for managerial-discretion problems in China. However, we didn’t find evidence that financial liberalization resulted in an easing of financing constraints for some, in particular, small firms, suggesting that the government’s change in focus towards SMEs has not been effective over the sample period. The study also shows that demand-pull variables are important factors in the determination of investment behaviours, suggesting that firms started to behave consistently with profit maximization. The findings reflect the transitional nature of the Chinese corporate environment