FMM Working Paper

: Schumpeter in practice: The role of credit for industrial policy in China

Since the late 1970s, the Chinese government has been undertaking major efforts in developing their countries economy by means of industrial policy. However, a more narrow approach to industrial policy has been pursued only since 2010, with the initiation of the 'Strategic Emerging Industries' program. China's state-dominated banking system is seen as playing a vital role in the financing of these endeavors. Based on a self-constructed data set originating from Chinese official statistics, we show in this paper that (1) there is generally a positive relationship between credit provision to the corporate sector and GDP growth in China, (2) this relationship is non-linear in terms of Chinese regions and credit-to-GDP ratio, and (3) that industrial policy targeting could have led to more investment and GDP growth, however, there are differences among industries and firm types. We thus show that the Chinese economic model could be seen as a practical implementation of Schumpeter's growth theory.