A Chinese puzzle
- Though their funds could earn much higher returns if invested domestically, Chinese banks invest overseas in low-yield investments like U.S. Treasury bills. Recent research suggests the explanation to this paradox may lie in firms’ differential access to bank credit, as well as different levels of productivity.
- The economists theorize that financial constraints limit credit access of productive entrepreneurial firms, while large but unproductive firms have access but don’t need funds. Lacking viable domestic opportunities, banks invest overseas.
- The economists’ empirical simulations largely support this theory, with a close match between model predictions and actual data trends over the past two decades.