My dissertation examines the impact of this misallocation of credit on firms' investment activities and productivity, drawing important implications regarding the potential for sustained economic growth in China. Understanding the relationship between China's financial system and the overall economy is critical to assessing the proper directions for reforms and thus for understanding China's future economic prospects. My dissertation investigate these links using data that cover the output, employment, and credit usage of hundreds of thousands of businesses in China, drawing on large firm-year data.

The first chapter of my dissertation addresses two related topics: (1) the relationship between financial constraints based on firm ownership status and the investment behavior of each firm; (2) the impact on investment of the government's policy to "Grasp the Large, Let Go of the Small" in which the official sector of China looks to lessen the advantages of smaller SOEs but maintain them for larger enterprises. This is a crucial policy issue for China, since understanding the investment behavior of firms is central to assessing the impact of reforms that affect the state-owned firms and move China yet further toward a market-oriented economy.

Chapter two then investigates the impact on firms' productivity growth of credit misallocation related to state ownership. The preferential access to credit enjoyed by SOEs affects investment as noted in the first chapter and this in turn affects productivity growth. This paper assesses whether the easy access to credit enjoyed by state-owned firms translates into slower productivity growth--that is, whether easy financing makes firms lazy. If so, then further moves to the market have immense potential to generate continued income gains.

Chapter three explores the relationship between the liberalization of banking sector, government debt and macroeconomic stability in China. This paper sets out the policy implications of bad lending for the financial sector and the public balance sheet. Reforms that sustain growth matter immensely for China. But with the Chinese economy increasingly linked to the entire world economy, better policy is vital for prosperity in the United States and all other nations.