Economic Research Journal, 2015, Issue 10

Authors: Luo Wei and Lyu Yue

Abstract: China's financial reform has entered a fortified stage, with the ability of resourcesallocation and service to the real economy increasing dramatically.While financial friction is stilserious,which restricts the financial reform's ice-breaking. This paper analyzes the export effectsof interest segmentation between folk and formal financial market caused by entry barriers offinancial market,and of credit allocation imbalance resulting from excessive concentration ofcredit allocation. Based on the framework of asymmetric information, we construct a model withfirm-level heterogeneity on productivity and financing capabilityin which financial marketssegmentation causes a negative impact on export,while credit allocation imbalance has a positiveexport effect, by spurring considerable low-productivity firms to engage in foreign market withcredit supporting, but only causing few high-productivity firms with credit constrained to quitfrom foreign market. However, those export effects of financial friction may both reduce nationa!welfare.These distinctive predictions are tested and confirmed by two-dimensional data of China'scity and manufacturing industry.

Key Words: Financial Friction; Financial Market Segmentation; Credit Allocation Imbalance; Heterogeneous Firms