China and Inner Asia

Organized Panel Session

1 - Determinants of Credit Allocation in China: A Survey Experiment

Thursday, March 22
7:30 PM - 9:30 PM
Location: Park Tower 8226, Lobby Level

What drives bank credit allocation in China? Specifically, what firm attributes—political and economic—determine their access to bank credit and the cost of accessing it? No convincing answer exists because of data paucity and endogeneity challenges associated with econometric analysis. This paper addresses this crucial question using a conjoint survey experiment of Chinese loan officers. Preliminary results show that SOEs will have continued access to bank largess in a tight credit environment, but this advantage decreases with increasing bank competition. In a relaxed credit environment, the SOE advantage is even smaller and decreases to a larger extent with increasing bank competition. Firm owners’/managers’ political connections do not seem to play a significant role. These results are corroborated using existing observational firm datasets and a unique spatial dataset of Chinese banks. One major takeaway of this research is that China’s state-controlled financial system has become increasingly commercialized without financial liberalization and privatization—but under increasing competition among banks owned by varying levels of the Chinese state. China’s experience has important implications for other developing countries, as it challenges orthodox political economy theories and policy prescriptions based on them, i.e. a limited government needs to be put in place first prior to developing financial markets.

Adam Yao Liu

Stanford University, California

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