Rise of Bank Competition: Evidence from Banking Deregulation in China

Posted: 15 Dec 2017 Last revised: 25 Dec 2019

See all articles by Haoyu Gao

Haoyu Gao

Renmin University of China

Hong Ru

Nanyang Technological University (NTU)

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Xiaoguang Yang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science

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Date Written: September 13, 2019

Abstract

Using comprehensive loan-level data in China, we investigate how the deregulation on bank entry barriers alters local banking industrial organization and its economic consequences. We document a novel trade-off: the potential benefits of deregulation are adversely mitigated by entrant banks’ preferences for lending to SOEs over more productive private firms. This credit misallocation accounts for 0.25% of GDP losses and is mainly due to SOEs’ soft budget constraints. Private firms need to provide more guarantees and higher ratings to borrow from entrant banks but enjoy lower interest rates. Access to these loans increases private firms’ investment, employment, profit, and ROA.

Keywords: Banking Deregulation, Credit Misallocation, Big Data, Growth

JEL Classification: G21, G28, L50, O40

Suggested Citation

Gao, Haoyu and Ru, Hong and Townsend, Robert M. and Yang, Xiaoguang, Rise of Bank Competition: Evidence from Banking Deregulation in China (September 13, 2019). Available at SSRN: https://ssrn.com/abstract=3087081 or http://dx.doi.org/10.2139/ssrn.3087081

Haoyu Gao

Renmin University of China

Mingde main building
Haidian district, No. 59,
Beijing, Beijing 100872
China

Hong Ru (Contact Author)

Nanyang Technological University (NTU) ( email )

S3-B1A-07
50 Nanyang Avenue
Singapore, 639798
Singapore
(+65) 67904661 (Phone)

HOME PAGE: http://https://hongru.mit.edu/

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Xiaoguang Yang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science ( email )

Beijing
China

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