The paper analyses the reallocation of bank credit between Italian sectors and companies following the entry of China into the World Trade Organization in 2001. It investigates whether this shock to world trade has had significant effects on the balance sheets of the banks most exposed to companies affected by Chinese competition, hindering the reallocation of the factors of production towards the most productive sectors or companies.
Trade liberalization with China led to a reduction in the supply of credit by the banks that, owing to the composition of their loan portfolio, were most exposed to the trade shock. The contraction of credit has affected not only the manufacturing firms most exposed to Chinese competition but also firms operating in the other manufacturing sectors (including those in which Italy has a comparative advantage) and in services.
