Credit Reallocation Effects of the Minimum Wage

Using a comprehensive firm-level and a unique confidential loan-level combined dataset, we examine the credit reallocation effects of minimum wage hikes in China. We show that in response to a wage rise shock, firms, especially those that are labor-intensive, are less likely to obtain a loan. Labor intensive firms that are still able to obtain bank loans outperform their peers indicated by a lower exit rate and higher future performances. Deal-level evidence shows that both the average default rate and loan spread decrease. Our overall evidence suggests that the surge of minimum wages result in a separating equilibrium in the bank loan market by filtering out low-quality borrowers