Financial Openness, Monetary Tightening, and Firm-Level Total Factor Productivity: Capital Allocation and Debt-Servicing Channels in China

Using a panel of Chinese A-share listed firms from 2014 to 2024 matched with a province-level index of de facto financial openness, this paper examines whether subnational financial openness mitigates the adverse effects of tighter domestic monetary conditions on firm-level total factor productivity (TFP). We find that tighter domestic monetary conditions are associated with lower TFP, but provincial financial openness acts as a buffer, alleviating this negative association. Mechanism analysis reveals two channels: (i) more efficient capital allocation, as the buffering effect is concentrated in firms with high external finance dependence; and (ii) reduced debt-servicing pressure, as financial openness particularly protects firms that rely heavily on short-term debt from rollover risk. Heterogeneity tests further show that private, small, young and capital-intensive firms benefit disproportionately from financial openness during tightening cycles, suggesting that financial openness enhances the allocative efficiency of the real economy by channelling resources to financially constrained yet productive firms.