Rise of Bank Competition: Evidence from Banking Deregulation in China
62 Pages Posted: 15 Dec 2017 Last revised: 24 Sep 2018
Date Written: September 16, 2018
Using proprietary individual level loan data and population bank branch data, this paper documents the economic consequences of the 2009 bank entry deregulation in China. We find that the deregulation leads to higher screening standards, lower interest rates, and lower delinquency rates of the loans from the new entrant banks. The incumbent state-owned banks do not respond much to the deregulation. Consequently, for the firms with bank credit access, the deregulation leads to increases in asset investment, employment, net income, and ROA in deregulated cities. These positive effects on loan terms and firm activities are more pronounced for private firms than state-owned enterprises (SOEs). In contrast, the deregulation amplifies bank credit from productive private firms to inefficient SOEs due mainly to SOEs’ soft budget constraint. This unintended adverse effect accounts for 0.31% annual GDP loss.
Keywords: Banking Deregulation; Credit Allocation; Growth; China
JEL Classification: G21, G28, L50, O40
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