Abstract: Financing difficulties and inadequate domestic demand are two difficult problems that China′s economy is facing. Under the uncertainty of Sino-US trade policy, China can mitigate its risks by expanding domestic demand. This paper uses an extended Manova (2013) model to analyze the impact of external financing constraints on the internal sales of enterprises through two channels, namely, restraining enterprises from entering domestic sales market and reducing internal sales intensity. Through the data of China′s industrial enterprises, this paper proves that bank financing constraints are the main reason for external financing constraints to restrain domestic sales. Our conclusions are robust to inclusion of additional variables, various instruments, alternative measures of bank credit and productivity. Based on the findings, this paper proposes to reduce bank financing costs of firms to expand domestic sales and promote the transformation and upgrading of Chinese exporters.

Key words: credit constraints, domestic sales, bank credit, trade credit