Inside the Black Box: Bank Credit Allocation in China’s Private Sector

36 Pages Posted: 31 Jan 2010

See all articles by Michael Firth

Michael Firth

Lingnan University - Department of Finance and Insurance

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Wong Sonia

Lingnan University - Department of Finance and Insurance; Lingnan University

Ping Liu

Krannert School of Management, Purdue University

Date Written: November 1, 2008

Abstract

Allen, Qian and Qian (2005, Journal of Financial Economics) explores the role of alternative financing channels (e.g., trade credits and private credit agencies) and governance mechanisms, such as those based on reputation and relationship, in explaining the growth of the private sector in China. We complement their study by examining how the Chinese state-owned banks allocate loans to private firms. We find that the banks extend loans to financially healthier and better-governed firms, which implies that the banks use commercial judgments in this segment of the market and are behaving more like their western counterparts. On top of this, however, we find that having a state minority ownership helps firms obtain bank loans, which suggest that political connections still play a role in gaining access to bank finance. In addition, we find that commercial judgments are important determinants of the lending decisions for manufacturing firms, large firms, and firms located in regions with a more developed banking sector; political connections are important for firms in service industries, large firms, and firms located in areas with a less developed banking sector.

Suggested Citation

Firth, Michael and Lin, Chen and Sonia, Wong and Liu, Ping, Inside the Black Box: Bank Credit Allocation in China’s Private Sector (November 1, 2008). Available at SSRN: https://ssrn.com/abstract=1544872 or http://dx.doi.org/10.2139/ssrn.1544872

Michael Firth

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
+852 2616 8160 (Phone)
+852 2466 4751 (Fax)

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Wong Sonia

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Rd
Tuen Mun
Hong Kong

Lingnan University ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

Ping Liu

Krannert School of Management, Purdue University ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
7654944691 (Phone)

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